Fed Board finalizes rule on single-counterparty credit limits for banking firms

The Federal Reserve Board votes June 14 to approve a final rule on single-counterparty credit risk.

A final rule setting single-counterparty credit limits for bank holding companies and foreign banking organizations with $250 billion or more in total consolidated assets was approved by the Federal Reserve Board Thursday by a unanimous vote of 3-0.

Effective in 60 days, the final rule requires compliance by January 2020 for global systemically important bank holding companies (GSIBs) and by July 2020 for all other banks affected by the rule. The board is also seeking comments on a related proposed information collection; comments are due 60 days after its publication in the Federal Register.

The final rule, which implements part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), is generally similar to the 2016 proposal and applies credit limits that increase in stringency as the systemic footprint of a firm increases.

Under the final rule, a GSIB will be limited to a credit exposure of no more than 15 percent of its tier 1 capital to another systemically important financial firm. (This reflects Fed Board staff’s analysis of the increased systemic risk posed when the largest firms have significant exposure to one another.)

A bank holding company with $250 billion or more in total consolidated assets will be restricted to a credit exposure of no more than 25 percent of its tier 1 capital to a counterparty. Foreign banks operating in the U.S. with $250 billion or more in total global consolidated assets, and their intermediate holding companies (IHCs) with $50 billion or more in total U.S. consolidated assets, will be subject to similar limits.

Consistent with the recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act, the limits in the final rule will apply only to GSIBs and bank holding companies with at least $250 billion in total consolidated assets. The Fed Board says it will consider the extent to which additional standards, including credit exposure limits, should apply to holding companies with total consolidated assets between $100 billion and $250 billion at a later date.

The Fed said that in response to comments, the final rule reduces regulatory burden by using common accounting definitions to simplify application of the exposure limits. In addition, a foreign bank’s combined U.S. operations, though not its U.S. IHC, will be considered in compliance with the final rule if a comparable rule is in effect in the foreign bank’s home country, it said.

The final rule is aimed at preventing concentrations of risk between large banking organizations and their counterparties from undermining financial stability. “As demonstrated during the financial crisis, excessive exposure between the largest financial institutions spread contagion and eroded confidence in these institutions,” the Fed said in its announcement of the final rule.

Federal Register notice

Information collection notice and request for comment

Federal Reserve Board approves rule to prevent concentrations of risk between large banking organizations and their counterparties from undermining financial stability