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

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.