A principal tenet of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 20101 ("Dodd-Frank
Act") was creation of a comprehensive approach for mitigating
threats to the financial stability of the United States
("U.S.") posed by systemically important financial
institutions ("SIFI").
The Dodd-Frank Act mandates a comprehensive set of regulatory
reforms designed to address threats to U.S. financial stability.
These reforms cover enhanced prudential regulation of large bank
holding companies ("BHC") and nonbank companies that are
designated by the Financial Stability Oversight Council
("FSOC") for additional oversight by the Board; enhanced
regulation of over-the-counter derivatives and other core financial
markets and financial market utilities; and orderly liquidation
authority for financial companies, among other important
reforms.
While the federal financial regulators have adopted key
macroprudential rules to fulfill the requirements of the Dodd-Frank
Act, several significant rules are still under development. Chief
among these is the adoption of a rule setting credit exposure
limits for large domestic and foreign banking organizations. The
Board originally proposed rules on single-counterparty credit
exposure limits in 2011 for domestic BHCs and in 2012 for FBO and
U.S. IHCs as part of a proposal to establish a set of enhanced
prudential standards, but the Board did not adopt these proposed
rules (collectively, the "Original Proposals") in the
final rule on enhanced prudential standards.2
On March 4, 2016, the Board invited public comments on a new
proposal (the "New Proposal"),3 pursuant to
Section 165(e) of the Dodd-Frank Act ("Section
165(e)"),4 that would apply increasingly stringent
single-counterparty credit exposure limits to large domestic and
foreign banking organizations as their systemic significance
increases, in accordance with the following framework:
- First Category: A domestic BHC, FBO, and U.S. IHC with total consolidated assets of $50 billion or more5 would be prohibited from having aggregate net credit exposure to a single counterparty in excess of 25 percent of the company's total regulatory capital plus allowance for loan and lease losses ("ALLL") not included in Tier 2 capital. This is the limit set by Section 165(e).
- Second Category: A domestic BHC, FBO, and U.S. IHC with total consolidated assets of $250 billion or more, or $10 billion or more in on-balance-sheet foreign exposures, would be prohibited from having aggregate net credit exposure to a single counterparty in excess of 25 percent of the company's Tier 1 capital.
- Third Category: A domestic BHC that is a global systemically important banking organization ("G-SIB"), any U.S. IHC with total consolidated assets of $500 billion or more, and any FBO with total worldwide consolidated assets of $500 billion or more—defined collectively as a "major covered company"—would be prohibited from having aggregate net credit exposure to a "major counterparty" in excess of 15 percent of the major covered company's Tier 1 capital. A "major counterparty" would include a major covered company, any other FBO that has the characteristics of a G-SIB, and any nonbank financial company designated by the FSOC for additional oversight by the Board.
The New Proposal is designed to "enhance the resiliency and
stability" of the U.S. financial system by setting a
"bright line on total credit exposures between one large [BHC]
and another large bank or major counterparty."6
Overall, the Board intends the New Proposal to mitigate risks to
financial stability that can arise from the interconnectivity among
major financial institutions because "trouble at one big bank
will bring down other big banks."7 In her opening
statement on the Board's consideration of the New Proposal,
Board Chair Yellen explained:
In the financial crisis, we learned that the largest and most
complex banks and financial institutions lent or promised to pay
large amounts to other institutions that were also very large and
complex. These credit extensions and promises did not eliminate
risk, and in many cases they magnified it.8
The limits on single-counterparty credit exposures in the New
Proposal are thus intended to be "tailored to the systemic
footprint of covered companies"9 by imposing
increasingly stringent limits as the systemic significance of a
covered company increases. The New Proposal would not apply to
credit exposures of any nonbank SIFI that the FSOC has designated
for additional oversight by the Board; however, these nonbank SIFIs
are considered counterparties for purposes of measuring credit
exposure limits for major covered companies, the largest and most
complex financial firms.10
The Board has invited public comments on all aspects of the New
Proposal through June 3, 2016, and has raised specific questions
and alternatives for comment throughout the New Proposal.
This White Paper describes key features of the New
Proposal, highlights important changes made to the New Proposal,
and explains differences between the New Proposal and the Basel
Committee on Banking Supervision's ("Basel
Committee") large exposures framework for internationally
active banks ("Large Exposures Framework") issued in
2014.11
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Footnotes
1 Public Law 111-203, 124 Stat. 1376 (2010).
2 77 Fed. Reg. 594 (Jan. 5, 2012); 77 Fed. Reg. 76628 (Dec. 28, 2012) (collectively "Original Proposals"); 79 Fed. Reg. 17240 (March 27, 2014) (codified at 12 C.F.R. part 252).
3 Single-Counterparty Credit Limits for Large Banking Organizations, 81 Fed. Reg. 14327 (proposed March 16, 2016) (to be codified at 12 C.F.R. part 252) ("New Proposal").
4 12 U.S.C. § 5365(e).
5 The proposed limits would apply to FBOs with $50 billion or more in total worldwide consolidated assets. New Proposal, 81 Fed. Reg. 14345.
6 Opening Statement on the Proposed Rule Establishing Single-Counterparty Credit Limits for Large Banking Organizations by Board Chair Janet Yellen (March 4, 2016).
7 Id.
8 Id.
9 Memorandum to the Board of Governors of the Federal Reserve System from Governor Tarullo on Proposed rules to implement single-counterparty credit limits in section 165(e) of the Dodd-Frank Act (February 26, 2016) ("Staff Memo").
10 Specifically, nonbank SIFIs are included as counterparties for purposes of the 15 percent limit that applies to major covered companies. See New Proposal, 81 Fed. Reg. 14330.
11 Basel Committee on Banking Supervision, Bank for International Settlements, Standards: supervisory framework for measuring and controlling large exposures (April 2014).
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