Risk & Compliance

Fed OKs Cap on Big Banks’ Credit Exposure

A final rule is aimed at reducing the threat that the financial difficulties of one large bank will spread to the system as a whole.
Matthew HellerJune 15, 2018

The U.S. Federal Reserve has approved a rule to reduce the threat that the financial difficulties of one large bank will infect the financial system as a whole.

The rule, which implements one of the last pending provisions of the 2010 Dodd-Frank reforms, requires the eight “systemically important” U.S. banks to limit the credit exposure they have with each other to 15% of high-quality capital.

In addition, all banks with $250 billion or more in total assets will have to cap their credit exposure to any single counterparty to 25% of high-quality, or tier 1, capital.

“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 H. Powell said in a news release.

As The Wall Street Journal reports, “The Fed proposed an initial version of the rule in 2011, but modified it significantly in response to industry complaints that it had overestimated their exposure to each other. The original proposal would have limited counterparty exposure between the largest banks to 10% of capital.”

Systemically important banks will be required to comply by January 1, 2020, and all other firms are required to comply by July 1, 2020.

A banking bill signed by President Donald Trump in May changed a threshold triggering enhanced regulatory scrutiny for banks to $250 billion in asset size, up from $50 billion. The Fed said it would consider “at a later date” whether to apply the credit exposure restrictions to banks with between $100 billion and $250 billion in assets.

According to The Financial Times, the regulator “has been trying to ease the burden on mid-sized and regional banks while continuing to focus supervisory attention on sprawling, complex banks like JPMorgan Chase, Goldman Sachs and Deutsche Bank.”