On March 4, the Federal Reserve Board (FRB) announced a re-proposal of rules that set single-counterparty credit limits for domestic and foreign bank holding companies with total consolidated assets of $50 billion or more. Prior versions of the rules, which will implement Section 165(e) of the Dodd-Frank Act, were proposed in 2011 and 2012.
In general, the rules will prohibit a US bank holding company, a foreign banking organization, and a US intermediate holding company of a foreign banking organization from having credit exposure to any unaffiliated company in excess of 25 percent of the entity’s capital stock, and surplus if the entity has $50 billion or more in total consolidated assets. The rules impose even tighter limits on dealings between the largest financial institutions, so that a bank classified as a global systemically important bank, or a G-SIB, will be restricted to a credit exposure of no more than 15 percent of the bank’s tier-one capital to another systemically important financial firm. In introducing the rules, FRB Chair Janet L. Yellen said, “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.”
A White Paper by the FRB that accompanies the proposed rule discusses the analysis and rationale for a more stringent single-counterparty rule that will apply to G-SIBs and for transaction between G-SIBs.
Comments on the proposed rules are due June 3.
The FRB press release and rule are available here.
The FRB White Paper is available here.