Fed plans se­cond ef­fort at lim­it­ing banks' ties to one an­other

The Pak Banker - - COMPANIES/BOSS -

The Fed­eral Re­serve is set to re-pro­pose long-de­layed rules for lim­it­ing busi­ness ties be­tween Wall Street firms such as JPMor­gan Chase & Co., Gold­man Sachs Group Inc. and Cit­i­group Inc., aim­ing to en­sure mega­banks won't take oth­ers with them if they fail.

The mea­sure to be voted on at a meet­ing in Wash­ing­ton on Fri­day rep­re­sents a se­cond try af­ter Fed gov­er­nors aban­doned a 2011 pro­posal to re­strict banks' credit ex­po­sure to any other fi­nan­cial firm to 10 per­cent of cap­i­tal. That orig­i­nal pro­posal, much tougher than a 25 per­cent re­stric­tion called for in the 2010 Dodd-Frank Act, was shelved af­ter re­ceiv­ing strong crit­i­cism from the bank­ing in­dus­try.

Congress in­cluded the safe­guard in the land­mark reg­u­la­tory law af­ter fi­nan­cial firms that fell dur­ing the 2008 credit cri­sis threat­ened to pull their trad­ing part­ners to­ward col­lapse. In the most in­fa­mous in­stance, Wall Street banks with credit ex­po­sure to Lehman Brothers Hold­ings Inc. got tax­payer-funded aid to help them weather that firm's bank­ruptcy.

In the years since the Fed's ini­tial pro­posal, other rules, re­stric­tions and su­per­vi­sion ef­forts have been in­tro­duced to limit con­cen­tra­tion of risk, in­clud­ing such de­mands as the liv­ing wills meant to show how big banks can fail with­out wreck­ing the wider fi­nan­cial sys­tem. And the Basel Com­mit­tee on Bank­ing Su­per­vi­sion, which sets in­ter­na­tional rules, agreed in 2014 to an ex­po­sure limit that was less-strin­gent than the U.S., call­ing for a 15 per­cent cap. Be­cause bankers were shaken by the 2011 ef­fort, they'll be care­fully watch­ing af­ter years of "ra­dio si­lence" how the Fed pro­posal treats de­riv­a­tives, sov­er­eign debt, short-term credit and clear­ing­house re­la­tion­ships, in ad­di­tion to how it de­fines the over­all cap­i­tal mea­sure­ment, ac­cord­ing to Adam Gil­bert, a for­mer New York Fed of­fi­cial who ad­vises on fi­nan­cial regulation at Price­wa­ter­house­Coop­ers LLP.

"If mean­ing­ful ad­just­ments from the orig­i­nal pro­posal are not made, the limit rule could end up be­ing prob­lem­atic for th­ese firms," Gil­bert said.

The plan to be dis­cussed Fri­day would cover U.S. and for- eign banks as well as fi­nan­cial firms des­ig­nated sys­tem­i­cally im­por­tant by the Fi­nan­cial Sta­bil­ity Over­sight Coun­cil, a panel of reg­u­la­tors cre­ated by Dodd-Frank to mon­i­tor threats to the econ­omy.

JPMor­gan, Cit­i­group and Mor­gan Stan­ley ar­gued that the ear­lier pro­posal over­stated risk and would hold back the econ­omy. Gold­man Sachs more specif­i­cally warned that it could de­stroy 300,000 jobs. The Bank of Ja­pan said a sim­i­lar rule af­fect­ing for­eign firms could hurt liq­uid­ity of high-qual­ity sov­er­eign debt.

Daniel Tarullo, the Fed gov­er­nor in charge of regulation, told Bloomberg Tele­vi­sion in Novem­ber that he didn't think the re­quire­ments would de­mand "dra­matic shifts" from banks. "Through the stress tests and other mech­a­nisms, we have al­ready been pay­ing a lot of at­ten­tion to coun­ter­party ex­po­sure," he said.

The Fed had plenty of room for com­pro­mise, in­clud­ing rais­ing the 10 per­cent limit, nar­row­ing what counts as credit ex­po­sure and eas­ing what's in­cluded in the cap­i­tal the firm tal­lies the per­cent­age against.

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