The Federal Reserve Board on Friday proposed a rule to address the risk associated with excessive credit exposures of large banking organizations to a single counterparty. As demonstrated during the financial crisis, large credit exposures, particularly between financial institutions, can spread financial distress and undermine financial stability.
The proposal would apply single-counterparty credit limits to bank holding companies with total consolidated assets of $50 billion or more. The proposed limits are tailored to increase in stringency as the systemic footprint of a firm increases:
- A global systemically important bank, or G-SIB, would be restricted to a credit exposure of no more than 15 percent of the bank’s tier 1 capital to another systemically important financial firm, and up to 25 percent of the bank’s tier 1 capital to another counterparty;
- A bank holding company with $250 billion or more in total consolidated assets, or $10 billion or more in on-balance-sheet foreign exposure, would be restricted to a credit exposure of no more than 25 percent of the bank’s tier 1 capital to a counterparty;
- A bank holding company with $50 billion or more in total consolidated assets would be restricted to a credit exposure of no more than 25 percent of the bank’s total regulatory capital to another counterparty;
- And bank holding companies with less than $50 billion in total consolidated assets, including community banks, would not be subject to the proposal.
“We are determined to do as much as we can to reduce or eliminate the threat that trouble at one big bank will bring down other big banks,” said Federal Reserve Board Chair Janet L. Yellen.
Similarly tailored requirements would also be established for foreign banks operating in the United States.
“This regulation would complement overall capital requirements, which are generally based on the size and nature of a bank’s assets, but do not address the concentration of risk in specific borrowers or counterparties,” Governor Daniel K. Tarullo said.
The proposed rule implements part of the Dodd-Frank Act and builds on earlier proposals released by the Board in 2011 and 2012, and includes some modifications based on comments received. Additionally, the proposal seeks to promote global consistency by generally following the international large exposures framework released by the Basel Committee on Banking Supervision in 2014.
The Board on Friday also released a white paper explaining the analytical and quantitative reasoning for the proposed rule’s tighter 15 percent limit for credit exposures between systemically important financial institutions. Because systemically important financial institutions are generally engaged in similar activities and exposed to similar risks, the paper discusses why systemically important firms are more likely to come under stress at the same time and, as a result, generally incur more risk when exposed to other systemically important firms compared to non-systemically important counterparties.
Comments on the proposed rule are invited until June 3, 2016.
