WASHINGTON — The Federal Reserve on Monday issued a set of proposed changes to its rules regarding intraday credit extensions to U.S. branches of foreign banking organizations.

The proposed rule would change the Fed system's approach to intraday credit, also known as daylight overdrafts, for U.S. branches of foreign banks. The proposal would eliminate the use of a bank’s "strength of support assessment", or SOSA, ranking and its status as a Foreign Holding Company to determine an institution’s daylight overdrafts.

SOSA rankings were originally developed as a linchpin of Fed supervision of foreign banking organization, but the system has largely moved on from the rankings and relied instead on other methods to assess an FBO’s creditworthiness. The daylight overdraft policy and access to the discount window are, in fact, the only supervisory areas that still reference SOSA rankings, the proposal said.

Federal Reserve building.
The proposed rule would change the Fed system's approach to intraday credit, also known as daylight overdrafts, for U.S. branches of foreign banks. Bloomberg News

“The Board believes that this is an inefficient use of the Federal Reserve’s supervisory resources, and that it should streamline the Federal Reserve’s FBO supervision program by discontinuing the SOSA ranking,” the proposal said.

The proposal would also eliminate provisions that automatically give foreign holding companies greater daylight overdraft capacity than FBOs. Instead, the Board put forward “alternative methods” to assessing an FBO’s creditworthiness, relying instead on the FBO’s U.S. Operations Supervisory Composite Rating, the bank’s home jurisdiction’s adherence to the Basel Accords and the presence or absence of any outstanding Prompt Corrective Action designations.

The Fed board said that it expects the proposed changes to “reduce net debit caps for some FBOs” but noted that the new process would result in debit caps that are “better tailored to FBOs’ actual usage of intraday credit and would not constrain FBOs’ U.S. operations.”

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