Explanation:
Following the 2007-2009 financial crisis, U.S. regulators established regulations (such as those under the Dodd-Frank Act) requiring foreign banking organizations (FBOs) to set up Intermediate Holding Companies (IHCs) in the U.S. if they have significant stateside assets. These IHCs and branches are required to conduct customized, localized liquidity stress tests. The primary objective is to ensure that these entities maintain adequate, stand-alone liquidity buffers within the U.S. to survive periods of financial stress. This prevents them from being overly reliant on their parent companies or offshore wholesale funding, which could quickly dry up during a global financial shock.
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Q.23 According to U.S. regulations, specific foreign banking organizations should conduct liquidity stress tests for intermediate holding companies and branches. Which of the following choices is the most valid reason for this regulation?
A
To prevent foreign banks operating in the country from been over-reliant on offshore funding.
B
Intermediate holding companies and branches share a common currency, hence no currency conversion.
C
Intermediate companies and branches are more likely to face liquidity challenges during stress periods
D
It is just a way of monitoring the liquidity levels for the intermediate holding companies.
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