Fed rule caps big banks’ interactions
The Federal Reserve is imposing limits on big banks’ credit exposure to one another with a new rule, though their interactions have already declined and the rule has been eased so much that all of Wall Street is already generally in compliance.
The credit limit — required by the 2010 DoddFrank Act as a way to keep a future crisis from spreading — was approved by the Fed’s board of governors Thursday. The measure reflects changes from a 2016 proposal that would have required banks to dial back exposures by as much as $100 billion, and it’s even less stringent than the Fed’s first try in 2011.
The Fed narrowed the rule to primarily affect banks with more than $250 billion in assets instead of those with more than $50 billion, which would have encompassed some smaller regional banks. The regulator also has tweaked its measurement methods to reduce the exposure math for affected firms.
The rule is meant to prevent a repeat of the fallout from the 2008 collapse of Lehman Brothers Holdings Inc., when the financial connections among Wall Street firms threatened to take down the entire banking system.
“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 in a statement.
The planned constraints had already been weakened over the years, and the final limits are in line with efforts from President Donald Trump’s appointed regulators — including Powell and a Fed vice chairman, Randal Quarles — to ease the burdens of
bank regulations.
The Fed is capping a global bank’s credit exposure to any of its peers at 15 percent of tier 1 capital — matching the 2016 proposal. Other large banks that aren’t among the most complex and systemically important face a 25 percent limit. But the calculations of credit exposure have been simplified, and the banks’ newly assessed exposures are generally well under the limit, with the Fed estimating that “the draft final rule is unlikely to have a material impact” on the affected firms. Specifically, the rule would let banks use internal models to tally “securities financing transactions” — a major part of their exposure.
Big foreign banks in the U.S. are also required to meet the credit limits, but the final rule adds an ability for them to comply by assuring the Fed that their home regulators already hold them to a similar standard.
Virtually all derivatives contracts in the U.S. banking system are concentrated among the largest firms, and other big banks are their main
trading partners. Those connections were highlighted by the 2008 crisis, when the U.S. government had to step in to keep investor panic from spreading through the financial system.
This final rule represents significantly less pressure than the first proposal in 2011, which would have limited the biggest banks to a much tighter 10 percent exposure.
Wall Street lobbyists have argued, though, that regulators have overstated risks already dealt with over the years by changes in how the banks do business, the implementation of other rules and supervisory efforts such as the Fed’s annual stress tests.
“The financial system more broadly has adjusted in the period since the crisis to reduce potential contagion by shrinking harmful transmission channels among banks,” Quarles said in a statement. “Central clearing of derivatives is an example of such a reduction in interconnectedness.”