The Treacherous Landscape For Foreign G-Sibs: The IHC Framework And Financial Stability

In 2010, the Dodd-Frank Wall Street Reform and Con- sumer Protection Act restructured the regulatory regime for fi- nancial institutions in the United States by mandating corpo- rate governance reforms and requiring that firms maintain high levels of high-quality capital reserves in their U.S. legal entities. Likely the most consequential of the statute’s provi- sions was that which authorized Regulation YY, a landmark regulation that transformed capital planning and risk man- agement processes among financial institutions in the United States. Along with implementing enhanced prudential stand- ards for the U.S. operations of large, complex financial insti- tutions, Regulation YY altered the corporate structure of for- eign banking organizations (“FBOs”) by requiring large foreign banking institutions to establish a new legal entity, called an intermediate holding company (“IHC”). Put simply, IHCs were created to reorganize and capture, in one umbrella legal entity, all non-branch U.S. operations of FBOs. Further, to ensure robust, localized oversight of U.S. operations, each IHC is required to establish their own board of directors and risk committee, separate and apart from the board and com- mittees of the broader organization. IHCs are also required to comply with both the capital and leverage ratio requirements applied to similarly large domestic financial institutions, and the programmatic requirements associated with firms of that size (resolution planning, CCAR, CLAR). 
 
 
 
There is another regulation, though, that when coupled with the far-reaching implications of Regulation YY has dis- parately impacted foreign banking organizations. That regu- lation is Regulation W, a longstanding regulation that limits the amount of intracompany transactions banking organiza- tions can engage in. Following the enactment of Dodd-Frank, Regulation W was amended in several ways which limited spe- cifically the types of transactions that FBOs often engage in with their affiliates to manage their liquidity risk and to ab- sorb liquidity shocks. The post-crisis changes made to Regula- tion W have already begun to be rolled back by U.S. regulators, however there has not yet been a detailed analysis of how spe- cifically the interaction between Regulation YY and Regulation W undermines global financial stability. 
The specific aim of this Note is to evaluate whether Regu- lation YY and Regulation W have destabilized the global fi- nancial system. Institutions’ 2018 and 2019 CCAR results will be the lens through which the impact of the regulations is eval- uated. Specifically, we look at both institutions’ Tier 1 capital ratios and Tier 1 leverage ratios to assess how specifically the IHCs have positioned their liquid capital and adjusted their business model in response to Regulation YY reorganization. Ultimately, we conclude that the interaction between Regula- tion YY and the revised Regulation W has dramatically frag- mented the global flow of capital among FBOs. Regulation YY’s IHC reorganization mandate largely cabins foreign banks’ ability to absorb liquidity shocks through their organi- zations—a result that may pose a serious threat to global fi- nancial stability. That is, the fundamental disruption of insti- tutions’ ability to funnel liquidity to their network of legal entities around the world raises a significant concern regard- ing their resiliency during periods of stress, particularly for those systemically important firms who experienced pervasive liquidity issues in the most recent crisis.

* J.D. Candidate 2020, Columbia Law School; B.A. 2015, University of Michigan. My sincerest thanks to Professor Jeffery Gordon, who was very helpful in directing the formulation of the topic of this Note. Additional thanks to my editorial staff at the Columbia Business Law Review for their diligent attention and wonderful work over the past year. I dedicate this Note, as I do all my work, to my mother Anita.

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There is another regulation, though, that when coupled with the far-reaching implications of Regulation YY has disparately impacted foreign banking organizations. That regulation is Regulation W, a longstanding regulation that limits the amount of intracompany transactions banking organizations can engage in. Following the enactment of Dodd-Frank, Regulation W was amended in several ways which limited specifically the types of transactions that FBOs often engage in with their affiliates to manage their liquidity risk and to absorb liquidity shocks. The post-crisis changes made to Regulation W have already begun to be rolled back by U.S. regulators, however there has not yet been a detailed analysis of how specifically the interaction between Regulation YY and Regulation W undermines global financial stability.
The specific aim of this Note is to evaluate whether Regulation YY and Regulation W have destabilized the global financial system. Institutions' 2018 and 2019 CCAR results will be the lens through which the impact of the regulations is evaluated. Specifically, we look at both institutions' Tier 1 capital ratios and Tier 1 leverage ratios to assess how specifically the IHCs have positioned their liquid capital and adjusted their business model in response to Regulation YY reorganization. Ultimately, we conclude that the interaction between Regulation YY and the revised Regulation W has dramatically fragmented the global flow of capital among FBOs. Regulation YY's IHC reorganization mandate largely cabins foreign banks' ability to absorb liquidity shocks through their organizations-a result that may pose a serious threat to global financial stability. That is, the fundamental disruption of institutions' ability to funnel liquidity to their network of legal entities around the world raises a significant concern regarding their resiliency during periods of stress, particularly for those systemically important firms who experienced pervasive liquidity issues in the most recent crisis.

I. INTRODUCTION
In the ten years since the close of the 2007-2009 financial crisis ("the crisis" or "the Great Recession"), much of the conversation among economists, policymakers, and legal academics has revolved around the regulatory and economic impact of the crisis within the United States. These discussions have been held for good reason; the congressional legislation passed in response to the crisis has now forced many financial institutions to fundamentally alter their risk profiles and business models. More specifically, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") transformed the way banking organizations price, oversee, and structure their own investment activities by introducing new prudential risk management standards and financial measures of soundness that financial institutions must now meet to maintain their bank charter. 1 These qualitative and quantitative expectations are not static for all financial institutions; indeed, a central piece of Dodd-Frank's statutory scheme is tailoring regulators' qualitative risk management expectations and quantitative financial benchmarks to financial institutions' size. 2 Tailoring regulatory expectations to institutions' relative asset size 3 in this way was meant to offer a risk-weighted regulatory framework for all financial institutions to operate within, acknowledging specifically the unique role of community banks and their higher cost of capital when compared to the largest financial institutions in the world. 4 This approach has been largely accepted as appropriate across the political spectrum, and in the years since the law's enactment bipartisan political blocs have continued to lobby for increased stratification in financial regulatory thresholds. 5 To apply these quantitative and qualitative standards to the largest financial institutions in the United States, Dodd-Frank introduced an entirely new concept in banking supervision-the annual, uniform, publicly-filed stress test. 6 Known as the Comprehensive Capital Annual Review ("CCAR"), this program, initially the brainchild of regulators' improvisation during the financial crisis, 7 emerged as the foundation of large, complex financial institution supervision in the post-recession era. Although intensely nuanced and complicated, at a high-level CCAR offers a point in time snapshot of the financial condition and risk management practices of the largest financial institutions in the United States, and ultimately determines if they meet both the qualitative and quantitative capital planning benchmarks otherwise established by section 165 of Dodd-Frank. 8 It is important to note at the outset that these programs have been extraordinarily controversial and costly for affected financial institutions,  although key regulators have responded by pointing to the significant increase in affected institutions' capital and liquidity buffers since CCAR began in 2010. 10 Still, the push against these regulatory programs has recently achieved a large victory with the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act ("the EGRRCPA") in 2018. 11 With this new law, the number of institutions required to participate in CCAR and comply with the most stringent enhanced prudential standards allowed by Dodd-Frank was reduced by increasing the qualifying asset threshold from $50 billion to $250 billion. 12 This threshold shift was completed in two stages. First, immediately following the EGRRCPA's enactment, financial institutions with consolidated assets of less than $100 billion were exempt from section 165 of Dodd-Frank. 13 12 Id. § 401(a). 13 Id. § 401(d). Although they are exempt from participating in the annual CCAR exercise, under the EGRRCPA the Federal Reserve retains the discretion to require institutions with over $100 billion in assets to comply with the enhanced prudential standards that only institutions with over $250 billion in consolidated assets are required to comply with. See id. § 401(a)(1)(B)(iii). The Federal Reserve does not retain this discretion for institutions with between $50 billion and $100 billion in assets; the only "enhanced standard" those institutions may be required to comply with is the risk committee requirement of section 165(h) of Dodd-Frank. See id. § 401(a)(4). See also Risk Committee Requirement for Bank Holding Companies with Total Consolidated Assets of $50 billion or More, 12 C.F.R. § enactment, the exemption threshold was raised to $250 billion. 14 This move was the first significant blow to Dodd-Frank's regulatory paradigm, and was intended to "simplify and improve the regulatory regime for . . . midsize banks and regional banks to promote economic growth." 15 Despite all the paradigm-shifting developments that took place in the United States following the crisis, the economic and regulatory consequences of the Great Recession reached much farther than just the financial markets in the U.S. Indeed, the economic consequences and market impact of the crisis in European and South American countries have been acknowledged by economists as being the most severe. 16 In 252.22 (2019). Importantly, the Federal Reserve has publicly stated that although endowed with this discretion under the EGRRCPA, the Board will not take action to require bank holding companies with less than $100 billion in total consolidated assets to comply with certain existing regulatory requirements. These requirements include the enhanced prudential standards in the Board's Regulation YY, the liquidity coverage ratio requirements in the Board's Regulation WW, and the capital planning requirements in the Board's Regulation Y. . . . [Additionally,] the Board will not take action to require [b]ank holding companies with total consolidated assets of less than $50 billion to comply with . . . Regulation YY, [ response, just as policymakers in the United States restructured the regulatory paradigm for financial institutions within their borders, global regulators have reformed their systems of financial regulation. Globally, the most dramatic of these regulatory redirections was that adopted in the European Union. The most meaningful regulation adopted in the EU following the crisis was that which created the European System of Financial Supervisors ("the ESFS"), 17 a body that provided an entirely new framework for financial supervision in the European Union. There are numerous regulatory agencies that operate under the ESFS framework, however two supervisory authorities are especially relevant for our purposes here: the European Banking Authority, which executes microprudential supervisory tasks for Europe's financial institutions, 18 and the European Systemic Risk Board, which is tasked with preventing and mitigating systemic risk in the Eurozone. 19 Parallel to the operations and responsibilities of the ESFS, in November 2012 the European Parliament adopted a resolution recommending that the European Commission establish a Banking Union. 20 The European Parliament has followed this recommendation, and has, in its own words, "contributed significantly to establishing a real Banking Union." 21 The first large step Parliament took toward achieving a Banking Union occurred in 2013, when it established what is commonly known as "the first pillar of the Banking Union," the Single Supervisory Mechanism ("the SSM"). 22 The SSM removed primary responsibility for "significant" financial institution regulation from the institutions' home country regulatory agency ("the Member State Regulator"), instead effectively centralizing the decisive regulatory authority for such institutions within the European Central Bank ("the ECB"). 23 Under this framework, although Member State Regulators maintain a regulatory role in supervising the financial institutions operating within their borders, direct supervision for significant institutions is delegated to the centralized SSM. 24 The criteria for determining whether a financial institution is considered significant-and therefore falls under the ECB's direct supervision-is set out in two separate regulations, and relates to a bank's size, economic importance, cross-border activities and reliance on public "bailout funds." 25 Outside the scope of the Eurozone and purview of the ESFS and Banking Union, financial institutions in the United Kingdom were also confronted with unique and unprecedently aggressive regulations in the wake of the financial crisis. In enacting the Financial Services (Banking Reform) Act, the English Parliament imposed new funding regulations and enhanced risk management standards on large banking institutions, 26 and, critically, also mandated that banks with more than £25 billion in core deposits be ring-fenced. 27  Thus, it should be gathered that the global regulatory overhaul following the financial crisis was dramatic, but fragmented, around the world. This fragmentation has imposed a dynamic and complicated regulatory environment for international banking organizations with large-scale operations in many countries, ultimately resulting in extraordinarily high compliance costs. 32 The central focus of this Note is to analyze the position of foreign banking organizations ("FBOs") with consolidated U.S. assets over $50 billion, 33 and their response to the regulatory overhaul implemented by Dodd-Frank. Specifically, Part II will begin by offering a brief history of FBOs in the United States and will then describe how FBOs generally organize their U.S. activities. Part II also introduces and describes the regulatory rules promulgated out of Dodd-Frank that will be the anchor guiding our discussion. Part III will present and discuss the results of the 2018 and 2019 CCAR exercises, comparing the IHCs' results to those of similarly sized institutions headquartered in the United States. Finally, given the findings of Part III's analysis, Part IV will argue for the reinstatement of a limited exception to Regulation , https://www.ifac.org/system/files/publications/files/IFAC-OECD-Regulatory-Divergence.pdf [https://perma.cc/QL66-NKT9] (finding that the current system of piecemeal global financial regulation costs the global economy more than $780 billion each year). 33 Despite the EGRRCPA's change of CCAR's consolidated U.S. asset threshold from $50 billion to $250 billion, in the interest of leveraging as much relevant data as possible to determine the impact of Regulation YY, all institutional data above $50 billion will be included in the empirical analysis of Part IV. Because the EGRRCPA was not signed into law until May 2018, institutions with consolidated assets of more than $50 billion were required to participate in the exercise in 2018. See Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, 132 Stat. 1296 (2018). Although the role of the EGRRCPA's threshold increase will no doubt be a ripe topic for further academic debate, it will only be a peripheral point in this Note.

II. THE REGULATORY ENVIRONMENT FOR LARGE, COMPLEX, FINANCIAL INSTITUTIONS
To assess the efficacy of the United States' financial regulatory regime in supervising foreign banking organizations and reducing global systemic risk, this Note will center its discussion around the regulatory rules promulgated out of Dodd-Frank. Specifically with respect to foreign banking organizations, the crucial regulatory changes that emerged out of Dodd-Frank were promulgated under Regulation YY and Regulation W. 34 Together, these rules require that foreign banking organizations fundamentally restructure their global legal entity framework and, as a result, their funding strategy.
Given that the IHCs submitted their first public stress test results in the summer of 2018, 35 the impact of the IHC paradigm has yet to be assessed comprehensively. However, before reaching our evaluation of Regulation YY and Regulation W, it is first necessary to explain the history of foreign banking organizations in the United States and how that historical context informs current FBO regulation.

A. Brief History of Foreign Banking Organizations in the United States
The global financial system is largely an advent of the past thirty years. Indeed, while there was certainly cross-border banking activity before the 1980s, "the scale of international banking changed dramatically between 1985  That is, in the years leading up to the financial crisis global banks' cross-border and foreign currency claims increased precipitously. 37 One driver of this growth in international banking was the globalization of the world's economy generally, however international banking activity has significantly outpaced international trade 38 in the twenty-first century. 39 The commonly accepted explanation among financial economists as to what has driven the rise of international banking, particularly over the past twenty years, is the emergence of FBOs as "market intermediaries." 40 Briefly, the market intermediary function of foreign banking organizations refers to the active role FBOs have recently taken in global capital markets. 41  FBOs into market intermediaries has largely been driven by their expansion into derivatives and interbank lending markets. 42 To illustrate the impact this change has had on the funding strategy of FBOs, it is helpful to describe one type of fee-generating transaction that FBOs routinely engage in: asset-backed securitizations. By way of background, asset-backed securitizations are financial products that allow banks to sell their loans by bundling them together into a tradeable bond and selling them to other financial institutions. 43 In the lifecycle of a securitization large global banks serve as middlemen, buying loans from commercial banks and packaging them into securitized tranches to be sold to investors. 44 That is, by design middlemen banks are not intended to retain exposure to the securitized products they create, they are meant to transfer credit risk from one party (the original lending commercial bank) to another (the securitization investor). 45 Initially, when securitizations became popularized in the 1970s, they were thought to be a force for stability given that they offered liquidity to commercial banks, whose balance sheets were otherwise inflexible, and diversified risk around the financial system. 46 At face value this understanding of securitizations is true, and indeed, there is nothing inherently unstable about securitized products. Practically, however, the transfer of credit risk associated with securitized transactions is often "not complete for various reasons, either because banks provided explicit or implicit support to special purpose vehicles, or because banks retained on [their] balance sheet some tranches of their structured issuances." 47 In the years leading up to the crisis many large foreign 48 banks retained remnants of their previously structured issuances on their balance sheet. 49 Commentators have offered several strategic explanations as to why foreign banking organizations retained these exposures leading up to the financial crisis, 50 however the structural explanation lies in the presence of "credit enhancements" in pre-crisis securitizations. 51 Credit enhancements are defined as "contractual arrangements in which a bank retains or assumes [securitized] exposure and, in substance, provides some degree of added protection to other parties in the transaction." 52 In effect, the 47  kind of internal credit enhancements that were leveraged by FBOs leading up to the crisis required them to retain junior interests in the securitized products they issued. 53 Although there is nothing inherently wrong with banks retaining exposure to securitized products, 54 the credit enhancements employed in the pre-crisis period were particularly problematic because of the "first-loss" position they put issuers in. 55 It is all important to note that, in addition to retaining junior tranches in the years leading up to the crisis, FBOs financed their securitization activities almost exclusively with dollar denominated, short-term wholesale funding. 56 That is, FBOs, while retaining long-term, illiquid assets on their balance sheets in the form of securitized products, were funding their operations with short-term, market-based funding. 57 This funding strategy is a classic "maturity mismatch," and ultimately led to disaster. 58  default in 2008, FBOs were left with a shortfall; they did not have a "natural base" of dollar deposits like their U.S. counterparts, and desperately needed dollar funding to support their dollar-denominated securitized assets. 59 As a result of the growing insecurities of all banking organizations, both domestic and foreign banks largely stopped lending dollars in the interbank market after the collapse of Lehman Brothers. 60 Additionally, short-term dollar funding (largely provided by money market funds in the U.S.) dried up following Lehman's failure. 61 The stress in dollar funding markets forced FBOs to sell their dollar-denominated assets and reduce lending rapidly-actions that further aggravated the stress in global credit markets. 62 The Federal Reserve responded to the widespread disruption in funding markets by introducing the Term Auction Facility ("TAF"), which allowed institutions experiencing liquidity pressures to borrow from the Federal Reserve at depressed interest rates. 63 For their part, "foreign banks in the United States loaned relatively less in overnight interbank markets [and]

B. Modern Regulatory Paradigm for International Banking Organizations
Before delving into the enhanced regulatory standards certain foreign banking organizations are now tasked with complying with, it is first necessary to outline the relevant regulatory actors in the United States and how they are each assigned responsibility under the Dodd-Frank paradigm. The U.S. financial regulatory framework has been heralded by outsiders as being extraordinarily complicated, 68 and thus for our purposes here the discussion will be greatly simplified, with an intention to only discuss those regulators who have some insight into and peripheral responsibility under Regulation YY and Regulation W.
There are three leading regulators of banking organizations in the United States: the Federal Reserve System ("the FRS"), the Federal Deposit Insurance Corporation ("the FDIC"), and the Office of the Comptroller of the Currency ("the OCC"). 69 Although each is tasked with a broad mandate, the relevant responsibilities of each changed significantly with the passage of Dodd-Frank and the advent of a new regulatory paradigm for financial institutions in the United States.
First, the Federal Reserve System is the relevant "owner" of Regulation YY. That is, the Federal Reserve is the agency tasked with implementing the stress tests and enhanced prudential standards of Regulation YY and ensuring that the mechanical transformations of the regulation (including IHC 68 (2018)). 78 See LABONTE, supra note 69, at 12. See also Enhanced Prudential Standards (Regulation YY), 12 C.F.R. § 252.1 (2020). 79 See Omarova, supra note 75, at 1690 ("[D]uring the crisis, the Board effectively rendered section 23A irrelevant by repeatedly allowing depository institutions to provide financing to their affiliated securities firms, derivatives dealers, money market funds, and even automotive companies . . . ."). . 81 See Resolution Plans (Regulation QQ), 12 C.F.R. § 243.1 (2020). Again, this threshold was altered with the passage of the EGRRCPA. Immediately following the EGRRCPA's enactment, financial institutions with consolidated assets of less than $100 billion were exempt from the resolution planning requirements of section 165(d) of Dodd-Frank. Eighteen months after the EGGRCPA's enactment, the exemption threshold was raised to $250 billion. See Economic Growth, Regulatory Relief, and Frank, the FDIC and the FRS are jointly primarily responsible for implementing Regulation QQ, the regulation that mandates that institutions submit resolution plans, and making final decisions as to a resolution plan's adequacy. 82 This delegation of responsibility to the FDIC, although perhaps seemingly out of sync with the rest of the FRS-centric paradigm of Dodd-Frank, is likely a result of the resolution planning process being derived from the FDIC's existing mandate of "orderly and efficiently managing and disposing of the assets of failed depository institutions." 83 Although delegated less authority under Dodd-Frank, the OCC "assumes responsibility for the ongoing examination, supervision, and regulation of federal savings associations" 84 under Title III of the statute. 85 Beyond its role in supervising savings associations, the OCC also maintains primary responsibility for federally chartered and licensed banks. 86  entity. 88 The centrality of branches to FBOs' funding flows and broader business strategies has resulted in the OCC working closely with the Federal Reserve in regulating FBOs, and now, the IHCs. 89 Interestingly, in imposing its own heightened risk management standards in its capacity as a primary and secondary regulator, the OCC has mirrored many of the enhanced prudential standards adopted by the Federal Reserve. 90 This effort by the OCC illustrates a broader point that, even beyond the collaboration required by Dodd-Frank, the three main financial regulators in the United States have made a concerted effort towards uniformity in promulgating their risk management and corporate governance standards to ease the cost and complexity associated with compliance for affected institutions. Although not directly relevant for our purposes here, it is pertinent to note in passing the existence of the Financial Stability Oversight Council ("FSOC"). FSOC was created by Title I of Dodd-Frank 92 and, in addition to monitoring the aggregate risk and stability of the U.S. financial system, is most importantly tasked with designating institutions as "systemically important financial institutions" ("SIFIs"). 93 The SIFI title is incredibly consequential, as it gives FSOC the authority to require nonbanks to comply with Regulation YY standards and thus be treated, for regulatory purposes, as banking organizations with more than $50 billion in consolidated assets. 94 It is not an over-exaggeration to note that this process has been the source of extreme outrage in the insurance and asset management communities, 95 with several large insurers obtaining the designation in the early days of FSOC's existence. 96 However, following successful litigation on the part of coordinate, but we found evidence that the agencies voluntarily coordinated on the rulemakings."). one designated nonbank, 97 and a new policy direction on the part of the Trump administration, 98 FSOC's use of the SIFI label has now been removed from all nonbanks. 99 Given this trend, it is increasingly unlikely, although not impossible, that a foreign-headquartered nonbank will be designated as a SIFI and thus brought into Regulation YY's purview in the near future.

C. Regulation YY, Regulation W, And IHC Reorganization
Now, before delving into subpart O of Regulation YY and its implications for foreign banking organizations, it is first necessary to outlay the other prudential risk management provisions of Regulation YY. Beyond providing helpful context for our analysis, these regulations are applicable to both IHCs and domestic banking organizations with U.S. non-branch assets over $50 billion. 100 As will become clear later in this analysis, the holistic cost of compliance with Regulation YY looms large still today over the business decisions made by the IHCs in restructuring their U.S. operations.
Undoubtedly, the most well-documented regulatory exercise introduced by Regulation YY is the capital stress test commonly known as "CCAR." 101 Broadly, the CCAR exercise requires that affected financial institutions stress their balance sheets annually in accordance with stress scenarios created by the Federal Reserve while maintaining capital levels 97  above the regulatory minima. 102 Additionally, the exercise requires that institutions demonstrate that they maintain appropriate contingency plans to obtain emergency funding in the event of a capital shortfall. 103 Perhaps the most consequential component of the CCAR exercise is that its results are made publicly available. 104 By the Federal Reserve's own statements, the rationale behind publicly disclosing the results of CCAR is to "help the public understand and interpret the results of the supervisory stress test, particularly with respect to the condition and capital adequacy of participating firms . . . [and] allow[] the public to make an evaluation of the quality of the Board's assessment." 105 Beyond public pressure, however, compliance with CCAR's risk management requirements has become extremely costly, with the approximate aggregate annual cost to filers being in the hundreds of millions of dollars. 106 As noted in section 165 of Dodd-Frank, in designing the enhanced risk management standards of Regulation YY the Federal Reserve has the authority to "differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size, and any other risk-related factors that the Board of Governors deems appropriate." 107 As it relates to corporate governance, this flexible grant of authority to the Federal Reserve has resulted in institutions with over $50 billion 102  ("A commitment by regulators to publish the results of supervisory stress tests and to tie certain actions to firms' quantitative results on those stress tests offers a potential mechanism to increase the credibility of the regulatory regime and improve communication with market participants."). 106 See U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 9, at 30. in consolidated U.S. assets being expected to have a well-qualified Chief Risk Officer in the United States and retain a local board risk committee to maintain a consolidated view of the institution's risk across portfolios. 108 Regulatory expectations as to the management of each individual risk stripe are largely institution-specific, however there are several broad themes consistent across institutions that regulators emphasize when identifying satisfactory risk management regimes. Namely, regulators expect that internal capital and liquidity stress tests are performed separate and apart from the CCAR exercise, 109 appropriate and timely management reports are produced with key summary statistics as to the aggregate risk in each division, 110 risk limits are established and complied with, 111 and institutions' internal controls and escalation processes are followed. 112

Regulation YY Subpart O and the Structure of International Banking Organizations
Certainly, as was previously alluded to, the frictions associated with coming into compliance with the enhanced prudential standards of Regulation YY are similarly experienced by both large foreign banking organizations and domestic banking organizations. However, foreign banking organizations face an additional requirement under Regulation YY: in accordance with subpart O, FBOs with over $50 billion in consolidated U.S. assets were required to reorganize their legal entity structure to establish an IHC by the compliance date of July 1, 2016. 113 This process of reorganization was extremely complex and resulted in affected institutions fundamentally restructuring their investment activities in the U.S. and globally, which will be succinctly described below. 108  Prior to IHC reorganization, large foreign financial institutions were only required to hold capital in the United States to the extent that they maintained a chartered U.S. banking entity. 114 Before Dodd-Frank was enacted, a foreign banking organization was required to establish a chartered banking entity in the United States only if the institution intended to accept retail deposits. 115 Thus, because most FBOs were not involved in retail banking activity in the U.S. prior to Regulation YY's promulgation, most did not have a chartered U.S. banking entity, operating instead through a "agency-branch" network. 116 As a result of this regulatory regime in the United States, all business done by foreign banking organizations in the U.S. served not only to accomplish the enterprise goals of the institution, but also offered liquidity to the broader organization, particularly for those business lines (retail banking, structured finance) that are relatively illiquid. 117 That is, in the pre-crisis era funds could flow freely between FBOs' U.S.   2018)). 133 Id. § 610. 134 12 U.S.C. § 371c-1 (2018). 135 Id. 136 Omarova, supra note 75, at 1692. 137 12 U.S.C. § 371c-1. See also S. REP. NO. 73-77, at 10 (1933) ("The greatest of such dangers is seen in the growth of 'bank affiliates' which devote themselves in many cases to perilous underwriting operations, stock speculation, and maintaining a market for the banks' own stock often largely with the resources of the parent bank."). 138  It is all important to note that not all transactions to affiliates are included in an institution's Regulation W calculation; only "covered transactions" are included in the computation. 142 This term has been historically controversial, 143 and prior to the financial crisis, Regulation W was notable for including several important exceptions to what is to be considered a "covered transaction." Namely, before the financial crisis derivatives transactions were not considered "covered transactions," an exception that, according to some, ultimately had disastrous consequences. 144 Although the Federal Reserve initially justified the exception by pointing to the funding benefits that it would bring for large, complex, interconnected organizations, 145  exception contributed to the undercapitalization of large banks in the most recent financial crisis. 146 Indeed, because many Regulation W waivers were granted by regulators during the financial crisis to allow institutions to provide emergency liquidity to their global affiliates, 147 policymakers prioritized changes to the regulation in their drafting of Dodd-Frank. 148 The elimination of the derivatives exception 149 has resulted in a dramatic disruption of FBOs' funding strategies. Intracompany derivatives transactions are extremely important liquidity risk management tools for financial institutions, and have historically afforded large financial institutions, particularly those with complex legal entity structures, the ability to hedge risks and absorb liquidity shocks across their organizations. 150 Now that the exemption has been eliminated and intracompany derivatives transactions are limited by the ten percent and twenty percent limits of Regulation W, some commentators have noted that banks' ability to manage their risks is "totally change global financial stability as complex banking organizations, rather than relying on intracompany derivatives to hedge their risks, are now forced to rely on third parties, ultimately increasing the interconnectedness of the financial system. 152 Amending the definition of "covered transactions" was not the only impactful change Dodd-Frank made to Regulation W. Indeed, the statute also tackled the financial subsidiary exemption, a provision that was initially promulgated under the Gramm-Leach-Bliley Act. 153 Although financial subsidiaries have always been included as "affiliates" for purposes of Regulation W, 154 prior to Dodd-Frank's enactment they were excluded from some of the regulation's requirements. 155 Specifically, "the aggregate amount of covered transactions between a bank and any one financial subsidiary . . . was not limited to 10% of the bank's capital and surplus, and the retained earnings of a financial subsidiary were excluded in calculating the bank's investment in the financial subsidiary (which is a covered transaction)." 156 Section 609 of Dodd-Frank eliminated this exemption and brought financial subsidiaries fully within the boundaries of Regulation W, 157 a change that many have . "Financial subsidiary" is defined under Regulation W to mean "any subsidiary of a national or state bank that engage[s] in an activity that a national bank is not permitted to engage in directly or that is conducted under terms that differ from those that govern the conduct of the activity by national banks." Robert E. It's worth describing, before discussing FBOs' CCAR results and their implications, the enormous impact the financial subsidiary exemption had on complex banking organizations' liquidity risk management. We begin with describing the basic funding strategy of FBOs prior to Dodd-Frank's enactment. In the pre-crisis period banking organizations were able to funnel liquidity in the form of retained earnings from a profitable financial subsidiary (like their U.S. broker-dealer, for example) to an entity that, because of the nature of its business, is relatively illiquid. 159 FBOs have made particular use of this funding strategy, which in the most recent financial crisis resulted in their relatively efficient absorption of liquidity shocks globally. 160  stability. That is, large FBOs often serve as critical stabilizing forces in economies with less developed banking systems, which in many cases prevents a broadscale contraction of credit in vulnerable regions. 162 Without their presence, developing economics around the world would be left significantly more vulnerable to economic crises, which, based on the interconnectedness of the global financial system, have historically proven capable of starting a global domino effect. 163 Now, with the elimination of the financial subsidiary exemption, complex banking organizations have lost control over how they manage their liquid assets. Including financial subsidiaries' retained earnings in the revised definition of "covered transactions" forces FBOs to either transmit a percentage of the earnings of its U.S. financial subsidiaries to the IHC parent, or to reduce its intracompany transactions in some other way. In other words, "[a]s the retained earnings of a financial subsidiary increases, the value of the parent bank's investment in the financial subsidiary increases." 164 To illustrate, consider an organization similar to that presented in Figure 2. In that case, the IHC's investment in its U.S. brokerdealer will increase to a level over ten percent "[u]nless the growth of the [IHC's] capital and surplus attributable to other business activities of the [IHC] outpaces that attributable to the financial subsidiary." 165 This outcome, that the growth of the IHC's banking business will outpace the growth of its financial subsidiaries, is extremely unlikely as virtually all of the business of the IHCs is conducted through their financial 162  subsidiaries. 166 Thus, because IHCs' banking businesses will likely not be able to keep pace with the growth of their financial subsidiaries, every subsidiary whose growth threatens to push an IHC over the ten percent single affiliate limit "will have to pay out at least some of its net income to the parent bank as dividends instead of reinvesting all of it in the expansion of the financial subsidiary." 167 Given the number of financial subsidiaries observed in Figure 2, and the fact that the retained earnings of every one will now count toward an IHC's twenty percent intracompany transaction limit, it is likely that liquid capital will be unnecessarily remitted back to the IHCs. Recall that any retained earnings that are not so remitted will be counted toward the ten percent and twenty percent limits of Regulation W. Additionally, any remittance the IHC attempts to make back to its U.S. financial subsidiaries (or any of its subsidiaries globally) will be subject to the ten percent single affiliate and twenty percent aggregate limits of Regulation W. As noted earlier, this outcome serves not only to deprive liquid capital from global affiliates of FBOs, but it also puts U.S. financial subsidiaries at risk. Thus, the interaction between Regulation W and Regulation YY results in capital being unnecessarily herded to one parent legal entity in the United States, however that parent's ability to support its subsidiaries, in the U.S. and around the world, is significantly cabined. It is predictable, then, that the elimination of the financial subsidiary exemption has resulted in FBOs winding down a significant amount of the business they conduct in the United 166 See, e.g., Barclays  States. 168 Beyond the economic implications of this trend in the U.S., FBOs now do not have the excess liquidity to spare to direct to targeted entities in times of stress. This reality, a problem of U.S. regulators' own creation, poses a significant and meaningful threat to global financial stability. 169

III. THE IMPACT OF REGULATION YY AND REGULATION W ON IHC CAPITAL
To evaluate the efficacy of Regulation YY, specifically when coupled with the recent changes to Regulation W, we now turn to the 2018 CCAR filings of the IHCs. As a level set, as of 2018 there were twelve IHCs, reflected along with their total U.S. consolidated asset size in Table 1. 170 Throughout this empirical analysis, we will largely consider the IHCs together as a means to categorically compare them to the domestic financial institutions subject to CCAR. 171 However, it is important to keep in mind the intrinsic differences in the strategies and business models of the individual firms. To highlight this point, and also to specifically exemplify broader thematic takeaways, institution-specific data will be cited throughout this analysis. 168  their "risk-weight," a multiplier-system created to more accurately reflect the risk on an institution's balance sheet. 175 Institutions' Tier 1 capital ratios are widely used in the regulatory community to indicate the appropriateness of a firm's capital planning, given that the measure reflects the size of a firm's high quality capital stock as a percentage of the riskadjusted size of its balance sheet. 176  [https://perma.cc/A3WD-R5MK] ("Banks typically leverage themselves by borrowing to acquire more assets, with the aim of increasing their return on equity. Economic leverage means that a bank is exposed to a change in the value of a position by an amount that exceeds what the bank paid for it."). 180 See id. at 5-6.
summaries of complex financial institutions' safety and soundness. 181   Clearly, as illustrated by Table 2, the 2018 quantitative CCAR results are dramatic, with the IHCs holding capital at levels well above that required by regulators, and at significantly higher levels than their peer firms headquartered in the United States. However, the capital retained by the IHCs, while relatively high as a percentage of their risk-weighted assets, is not relatively high as a percentage of their total consolidated assets. These results suggest that, although the IHCs hold significantly more high-quality capital on their balance sheets as a percentage of the risk they take, they are just as reliant on external debt as the Domestics. This finding is consistent with the reports that FBOs have wound down much of their U.S. operations in preparing for IHC reorganization. 185 That is, based on the financial disclosures of the IHCs outside the CCAR exercise, we can conclude that their relatively high Tier 1 capital ratios likely result from a decrease in IHCs' RWAs. On one hand this may be viewed as a positive trend by regulators, as it implies that FBOs have undergone a significant de-risking in the United States. 186  however, this trend also signals that the IHCs are maintaining unduly large stocks of high-quality capital stagnantly on their balance sheets. In other words, we can conclude that FBOs are not using their stock of high-quality capital in the U.S. to fund their activities; the capital is instead left "trapped" at extremely high levels in their IHCs. 187 This development lends support to the analysis of Regulation W offered in Section II.C. However, there is another statistical point relevant to note from the 2018 CCAR exercise that further illustrates the impact of Regulation W on the IHCs' capital ratios. That is the standard deviation of the IHCs' results, depicted in Table 3   The extremely high standard deviation observed in the IHCs' Tier 1 capital results is largely a function of three IHCs holding extremely high levels of capital: Credit Suisse, Deutsche Bank, and UBS. 189 Each of these institutions' Tier 1 capital ratio was above 22.8% under the adverse stress scenario created by the Federal Reserve, nearly eight percent higher than the IHC average, 190 and nearly seventeen percent higher than the regulatory minimum. 191 These three institutions are widely considered to be three of the four most systemically important FBOs operating in the United States due to their involvement in U.S. capital markets. 192 It is all the more important, then, to explore these unusual results as they likely have had, and will continue to have, important economic implications in the United States.

B. 2019 CCAR Results
We now turn to 2019's CCAR exercise which, as a result of the threshold changes introduced by the EGRRCPA, had only eighteen filers. 193 As we would expect, the results from the 2019 exercise are similar, but even more stark, than those of the 2018 exercise.  These results suggest that the same trends described above continue through to today. In 2019, again, the three FBOs previously discussed were those that held Tier 1 capital at levels well above their IHC peers, resulting in a very high IHC Tier 1 standard deviation. 196 Thus, despite the inefficiencies that result from holding high-quality capital at such levels, 197 it appears that those FBOs with large U.S. broker dealers cannot redirect their excess capital to their other global legal entities. This is the result we would expect following the elimination of Regulation W's financial subsidiary exemption. That is, because the ten percent single affiliate and twenty percent aggregate annual limits now apply to IHCs' investment in their financial subsidiaries (which includes the subsidiaries' retained earnings), it follows that the institutions are, with every passing year, building up more and more capital at the IHC level. This relationship between IHCs' financial subsidiaries and their stock of high-quality capital will continue to exist as long as the growth of their financial subsidiaries "outpaces that attributable to . . . the parent." 198 This clearly explains why the IHCs have dramatically reduced the size of their U.S. operations in recent years, and has been 195 See id. 196  reported by several journalists as being the driving force behind the IHCs' de-risking. 199 It seems as though these three firms themselves have also recognized Regulation W's role in trapping capital in their IHCs. Industry groups that represent Deutsche Bank, Credit Suisse, and UBS have made public statements addressing the high levels of Tier 1 capital maintained by the IHCs, noting that the requirements of Regulation W have "trap[ped] liquidity in the United States that could potentially be deployed more effectively elsewhere." 200 Other industry trade associations have also weighed in on the development, with the Bank Policy Institute noting that FBOs' high capital ratios "undermine the resiliency of the global financial system." 201 The Bank Policy Institute went on to offer a more detailed analysis of the complications associated with misallocation risk, noting that: Applying full requirements in the host jurisdiction . . . effectively increases consolidated requirements for the FBO because of the requisite high degree of pre-positioning in host jurisdictions and the lack of flexibility to deploy resources throughout the organization. If many, much less all, host authorities were to act independently to require full pre-positioning in their own jurisdictions, this would exacerbate the problem of depleting available resources at the top of the group and would thereby limit the group's ability to allocate resources efficiently and, during stress, to deploy resources where actually needed. 202 Global regulators have also chimed in on this point. In a recent report the Financial Stability Board ("the FSB") noted that "[t]he domestic requirements that were adopted in some jurisdictions (e.g. subsidiarisation requirements, requirements to establish intermediate holding companies, high-levels of pre-positioning requirements) tend to favo[r] domestic activities and trap resources at local levels." 203 The statements of the FSB reflect a growing consensus among regulators that subpart O of Regulation YY and the revised Regulation W undermine one of the key pillars of the post-crisis global regulatory regime: improving the resolvability of complex financial institutions. 204 Thus, the problems identified in the 2018 and 2019 CCAR results are consistent with the Regulation W analysis offered in Section II.C, the shrinking balance sheets of the IHCs, the statements of the FBOs themselves, and, increasingly, the perspective of both U.S. and global regulators. Indeed, regulators' recognition of the complications associated with Regulation YY has already led to some changes in the IHC regulatory framework, 205 however the most important provisions of the regulation have yet to be addressed.

IV. PROPOSED AMENDMENTS TO REGULATION W
It goes without saying that the money, time, and political capital spent to establish the IHC framework in the United States make its repeal implausible. However, there are small, meaningful changes that can be made to Regulation W to lighten the burden on FBOs and, more importantly, improve the stability of the global financial system.
We begin with the first provision of Regulation W discussed in Section II.C-the elimination of the derivatives exception. Recall that the elimination of that exception revised the definition of "covered transactions" under Regulation W to include derivatives transactions. 206 This change was highly controversial, with some academics arguing that the change "was a mistake by Congress." 207 Critics of the exception's elimination point to the liquidity risk management benefits associated with intracompany derivatives transactions 208 and the systemic risk created by forcing complex financial institutions to rely on third parties to execute their hedging strategies. 209 Indeed, one commentator went as far as to say that the elimination of the exception "had nothing to do with the crisis and [it] . . . diminish[es] the ability of affiliated companies to manage risk on a consolidated basis and . . . exacerbate[s] interconnectivity among unaffiliated financial institutions." 210 However, while intracompany derivatives transactions do play an important role in complex financial institutions' funding strategies, they also are associated with a significant degree of credit risk. That is, in the words of Professor Omarova, the derivatives exception, when in effect, "opened up a nearly unlimited channel for . . . extensions of credit." 211 The experience of U.S. regulators in the financial crisis exposed the significant risks these extensions of credit pose to the U.S.

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TREACHEROUS LANDSCAPE 387 financial system. To illustrate these risks, we turn to the example of American Insurance Group, Inc. ("AIG"), a financial institution that nearly failed during the crisis. 212 AIG is an insurance company that was a major player in the credit default swap ("CDS") market leading up to the financial crisis. 213 As subprime bonds began to default in 2008 and CDS contracts became due, AIG was left with a shortfall. 214 Complicating this position, AIG executed most of its CDS contracts, not through its parent entity, but through a subsidiary, AIG Financial Products ("AIGFP"). 215 This organizational strategy is important for several reasons-first, because it allowed AIG to largely conceal its CDS activity from regulators, 216 and second, because it resulted in massive intracompany derivatives transactions emanating from the AIGFP entity. 217 This intracompany derivatives exposure led to what one government official called a "house of cards," 218 and made AIGFP critical to the survival of AIG, and the U.S. financial system more generally. 219 That is, the failure of AIGFP would not only leave its outside counterparties without the funding they had contracted for, but also would undermine many of its affiliate counterparties, almost certainly leading to the complete collapse of AIG. 220 In the words of one regulator, "[w]hile the downfall of AIG was not caused by inter-affiliate swaps, the events surrounding AIG during the 2008 crisis demonstrate[d] how the risks of uncleared swaps at one affiliate can have significant ramifications for the entire affiliated business group." 221 Thus, despite the protests of critics, there is little doubt that intracompany derivatives transactions post some risk to the global financial system, and if left unregulated, may seriously damage the resiliency of systemically important financial institutions. However, before moving on to a solution, we look to a proposal that was recently made by the OCC itself. In November 2019 the OCC issued a Notice of Proposed Rulemaking which, if adopted, would eliminate the initial margin requirements associated with intracompany derivative transactions. 222 By way of background, initial margin ("IM") in derivatives transactions is a collateral tool that requires a counterparty to post a percentage of the derivative instrument's value in cash or liquid assets prior to the performance of the contract. 223 In the context of intracompany derivatives within relieve the amount of Tier 1 capital that FBOs are currently holding in their IHCs. Indeed, the Chair of the FDIC herself seemed to endorse this notion in remarking that the NPRM aims to address the presence of "locked up" and "frozen" capital maintained within banking legal entities. 228 Assuming this NPRM is finalized in the coming months, the question still remains as to whether intracompany derivatives should be included as "covered transactions" at all under Regulation W. In considering this question we turn back to the experience of AIG during the financial crisis, and the emphasis regulators have placed on resolution and resolvability in the post-crisis era. 229 Given the role AIG played in the financial crisis and the complications the firm's intracompany derivatives introduced, 230 it seems that a complete restatement of the derivatives exception would be unwise. The initial margin NPRM aims to address the major issue this Note identified, the excessive pre-positioning of high quality capital in IHC legal entities, and further regulatory rollback that potentially exposes investors to greater risk and undermines U.S. regulators' goals of orderly resolution is unnecessary and could be counterproductive. Indeed, as the affiliate margin proposal was tailored, several prominent regulators acknowledged that a writ large reintroduction of the exception may introduce financial stability issues, 231  banking organizations themselves appeared to endorse in their collective comment letter on the point. 232 This agreement reflects how far we have come in the ten years since Dodd-Frank's enactment-although still not agreeing on everything, it seems as though the process of regulatory "tailoring" has been more collaborative than adversarial.
There is still one more provision of Regulation W to address: the financial subsidiary exemption. Recall that when the exemption was in effect, intracompany transactions with financial subsidiaries did not count toward Regulation W's single affiliate limitation, and, most importantly, "the retained earnings of [] financial subsidiar[ies] were excluded in calculating the bank's investment in the financial subsidiar[ies] (which is a covered transaction)." 233 The broader implications of the exemption's elimination were discussed in Section II.C, however for our purposes here it is enough to note that many have remarked that the elimination will likely result in the forced upstreaming of high-quality capital away from U.S. financial subsidiaries (like U.S. broker-dealers, for example) to the parent IHC.
The financial subsidiary exemption's elimination is more likely to be driving the 2018 and 2019 IHC CCAR results than the derivative exception's elimination. That is, while commentators noted that initial margin posted on intracompany derivative transactions drained nearly $40 billion of liquidity from affected institutions, 234 a review of the IHCs' FR Y-9LP disclosures reveals that the retained earnings of IHCs' financial subsidiaries dwarfs that number. 235  2019 FR Y-9LP disclosures shows that the IHCs have substantially reduced the amount of activity housed in their financial subsidiaries, 240 supporting the reporting done by journalists 241 and the hypotheses several commentators posed before the exemption's elimination went into effect. 242 It is worth noting, though, that the elimination of the financial subsidiary exemption does not only affect FBOs. However, the importance of the exemption specifically for FBOs relates to the traditional FBO funding model, discussed in Section II.C. That is, because IHCs have reached their Regulation W intracompany transaction limit through their "investment" in their nonbank subsidiaries, they are unable to direct liquidity to their global affiliates around the world. 243 This development may have already proven to seriously undermine global financial stability, as global affiliates of FBOs have struggled significantly during the COVID-19 pandemic. 244 Thus, beyond the economic damage trapped capital causes in U.S. capital markets, the elimination of the financial subsidiary exemption also fragments the flow of capital throughout the world, unnecessarily exposing certain regions' financial systems to liquidity stress and potential collapse. For this reason, too, it is crucial that U.S. regulators begin to reconsider the elimination of the exemption to improve the stability of the global financial system. have in the past acknowledged the importance of supporting subsidiaries under stress for exactly this reason. This begs the question-why wait until a crisis hits to allow financial institutions to manage their capital freely across their global organizations? Binding the hands of large, systemically important foreign banking organizations makes all of us less prepared for the next major financial crisis, which indeed, may already be in its beginning stages.