Banking and Finance Law Daily Fed proposes single-party credit exposure limits for large holding companies
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Monday, March 7, 2016

Fed proposes single-party credit exposure limits for large holding companies

By Richard A. Roth, J.D.

The Federal Reserve Board is again proposing rules that would restrict large domestic and foreign bank holding companies’ credit exposures to single counterparties. The proposal offers different restrictions on U.S. and foreign BHCs and would establish stricter limits as the systemic importance of the BHC and the counterparty increases. According to the Fed, only BHCs with total consolidated assets of $50 billion or more would be affected. Comments on the proposal to add a new Subpart H to Reg. YY—Enhanced Prudential Standards (12 CFR Part 252) are due by June 3, 2016.

The proposal would implement Dodd-Frank Act Section 165(e), the Fed says. Rules for U.S. BHCs originally were proposed in December 2011, with proposed rules for foreign BHCs coming in December 2012. The new proposals offer more differentiation among BHCs and counterparties.

Covered companies and exposures. The proposal divides U.S. BHCs into two categories:

  • major covered companies—BHCs that are global systemically important banking organizations; and
  • covered companies—BHCs with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures, and BHCs that exceed either threshold but are not G-SIBs.

Counterparties also are divided into two categories:

  • major counterparties—G-SIBs or nonbank financial companies that have been designated as systemically important financial institutions; and
  • other counterparties—counterparties that do not reach the threshold for being “major.”

The exposure of a BHC to a counterparty would be determined on a consolidated basis. All of the credit exposure of all parts of the banking organization to all entities controlled by the counterparty would be totaled. BHCs would be expected to monitor and control their exposure to counterparties on a consolidated basis.

Proposed U.S. BHC limits. The proposal would establish three separate limits for U.S. BHCs:

  • A covered company with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of its total regulatory capital plus its allowance for loan and lease losses to any counterparty.
  • A covered company with more than $250 billion in total consolidated assets or more than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of its tier 1 capital to any counterparty.
  • A major covered company would have a credit exposure limit of 15 percent of its tier 1 capital to any major counterparty, and of 25 percent of its tier 1 capital to any other counterparty.

Foreign BHCs. The proposed rule for foreign BHCs also would apply only to organizations with total consolidated assets of at least $50 billion. It would apply to any intermediate holding company that such an organization was required to create.

The limits for foreign BHCs would be comparable to those for U.S. BHCs. They are, however, a bit more complex due to the need to account for intermediate holding companies. Under the proposal:

  • A U.S. intermediate holding company with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of the intermediate company’s total regulatory capital plus its ALLL not included in tier 2 capital to any counterparty.
  • The combined U.S. operations of a foreign BHC with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of its total regulatory capital to any counterparty.
  • A U.S. intermediate holding company with $250 billion or more in total consolidated assets or more than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of the intermediate company’s tier 1 capital to any counterparty.
  • The combined U.S. operations of a foreign BHC with $250 billion or more in total consolidated assets or $10 billion or more in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of the BHC’s worldwide tier 1 capital to any counterparty.
  • A major U.S. intermediate holding company, or the combined U.S. operations of a foreign BHC, would have a credit exposure limit of 15 percent of tier 1 capital to any major counterparty. The limit on exposure to any other counterparty would be 25 percent of tier 1 capital.

The Fed’s proposal notes that unlike U.S. BHCs, foreign BHCs are measured only based on size, regardless of whether they have been identified as G-SIBs. The proposal explicitly asks for comments on this. It also includes 57 other specific queries.

White paper analysis. At the same time, the Fed published “Calibrating the Single-Counterparty Credit Limit between Systemically Important Financial Institutions,” a white paper intended to explain the rationale for the stricter, 15-percent limit on credit exposures between G-SIBs. According to Fed Governor Daniel K. Tarullo, the Fed staff estimates that “almost all of the roughly $100 billion in current exposures among domestic firms that would exceed these limits is attributable to exposures among GSIBs.”

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