By Lee P. Dunham, J.D.
On June 14, 2018, the Federal Reserve Board approved a rule to establish single-counterparty credit limits restricting overall credit exposures between very large banks. The rule implements section 165(e) of the Dodd-Frank Act, which requires the Board to impose limits on the amount of credit exposure that a bank holding company or foreign banking organization can have to an unaffiliated company in order to reduce the risks arising from the company’s failure. The rule is similar to the earlier proposed version of the rule put out for comment in 2016.
Chairman Jerome H. Powell stated that the credit limits under the new rule are "tailored to the size of the firm," with the largest banks having maximum exposure to another large bank set at 15 percent of Tier 1 capital, a limit "tougher than required by statute" but supported by "a careful analysis showing that the financial system as a whole faces increasing risks when these firms have too much exposure to each other." Smaller firms "will face less-stringent restrictions." Consistent with the recently passed Economic Growth, Regulatory Reform, and Consumer Protection Act, the limits in the final rule will apply only to global systemically important bank holding companies and to bank holding companies with at least $250 billion in total consolidated assets. The Board reserved consideration of the extent to which additional standards should apply to holding companies with total consolidated assets between $100 billion and $250 billion for a later date.
The rule will impose similar limits on foreign banks with $250 billion or more in total global consolidated assets, and their U.S. intermediate holding companies with $50 billion or more in total U.S. consolidated assets. A foreign bank's combined U.S. operations, though not its U.S. intermediate holding company, will be considered in compliance if a comparable rule is in effect in the foreign bank's home country.
Board support. Vice Chairman for Supervision Randal K. Quarles also expressed pleasure with the rule’s "efficient approach to setting limits that are appropriately adjusted for firms of lesser systemic importance" and use of "clear and well understood accounting principles" to define the firms and counterparties subject to the rule.Governor Lael Brainard expressed support for the rule, which he described as "overdue," and stated that work was still needed to safeguard the resilience of the financial system through the cycle, particularly the finalization of "the second rule that has been outstanding since 2016, the net stable funding ratio."
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