Fed proposes to limit risk of large banks, counterparties

The Federal Reserve Board approved a rule last week to prevent concentrations of risk between large banking organizations and their counterparties.

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Too much exposure between the largest financial institutions can spread contagion and erode confidence in these institutions, as was the case in the 2008 financial crisis, said the Fed.

The rule applies credit limits that increase in stringency as the size of a firm increases. A global systemically important bank (GSIB) holding company, for example, would be limited to a credit exposure of no more than 15 percent of the GSIB’s tier 1 capital to another systemically important financial firm.

“This final rule is another step in sustaining an effective and efficient regulatory regime that keeps our financial system strong and protects our economy while imposing no more burden than is necessary to get the job done,” Fed Chairman Jerome Powell said.

Also, a bank holding company with $250 billion or more in consolidated assets would be restricted to a credit exposure of no more than 25 percent of its tier 1 capital to a counterparty. Foreign banks operating in the U.S. with $250 billion or more in total global consolidated assets would be subject to similar limits.

“The final rule adds to the robust capital and liquidity positions of the financial system today by setting out clear limits on credit exposures among the largest banking firms,” Fed Vice Chairman Randal Quarles said. “I am pleased by the final rule’s efficient approach to setting limits that are appropriately adjusted for firms of lesser systemic importance.”

The rule only applies, however, to GSIBs and bank holding companies with at least $250 billion in total consolidated assets. GSIBs must comply by Jan. 1, 2020.