On June 14, 2018, the Federal Reserve Board voted to finalize and adopt a rule preventing concentrations of risks between large banking institutions and their counterparties from undermining financial stability.1
Rule Overview2
Under the final rule, the aggregate net credit exposure of affected financial organizations to a single counterparty is subject to one of two credit exposure limits and tailored to the size and systemic footprint of the firm.
- The first limit applies to any covered company, which is prohibited from having aggregate net credit exposure to an unaffiliated counterparty greater than 25 percent of its tier 1 capital.
- The second limit prohibits any major covered company from having aggregate net credit exposure greater than 15 percent of its tier 1 capital to a major counterparty.
A “major counterparty” is defined as a global systemically important banking organization (GSIB) or a nonbank financial company supervised by the Board.
Scope of Affected Financial Organizations3
The following types of financial organizations are affected by the final rule:
- Bank holding companies and foreign banking organizations operating in the U.S. with $250 billion or more in total consolidated assets;
- U.S. intermediate holding company of such a foreign banking organization with $50 billion or more in total consolidated assets;
- Bank holding company identified as a GSIB4 under the Board’s capital rules. A foreign banking organization (FBO) that is subject on a consolidated basis to a home country’s Single-Counterparty Credit Limit (SCCL) framework will be able to comply with the SCCL for its combined U.S. operations. To do so, the FBO needs to certify to the Board that it meets large exposure or SCCL standards on a consolidated basis (as established by its home country supervisor), and that are consistent with the large exposure standard, unless the Board determines, in writing, after notice to the FBO, that compliance with the final rule is required.5
Compliance Effective date6
GSIBs will be required to comply by January 1, 2020, and all other firms are required to comply by July 1, 2020.
References
- “Federal Reserve Board approves rule to prevent concentrations of risk between large banking organizations and their counterparties from undermining financial stability,” Board of Governors of the Federal Reserve System, Press Release, June 14, 2018. Access at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180614a.htm
- “Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations,” Federal Reserve System, Final Rule. Access at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180614a1.pdf
- “Federal Reserve Board approves rule to prevent concentrations of risk between large banking organizations and their counterparties from undermining financial stability,” Board of Governors of the Federal Reserve System, Press Release, June 14, 2018. Access at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180614a.htm
- “2017 list of global systemically important banks (G-SIBs),” Financial Stability Board, November 21, 2017. Access at: http://www.fsb.org/2017/11/2017-list-of-global-systemically-important-banks-g-sibs/
- “Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations,” Federal Reserve System, Final Rule. Access at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180614a1.pdf
- “Federal Reserve Board approves rule to prevent concentrations of risk between large banking organizations and their counterparties from undermining financial stability,” Board of Governors of the Federal Reserve System, Press Release, June 14, 2018. Access at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180614a.htm
Newsletter Author: Venetia Woo, Mairi Bryan, Gioacchino Pullara
Newsletter Contact Person: Venetia Woo
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