United States: Another Brick In The Wall: The Fed Reproposes Single-Counterparty Credit Limits For Large Banking Organizations

On March 4, 2016, the Board of Governors of the Federal Reserve System (the "Fed") issued a Notice of Proposed Rulemaking ("NPRM"), inviting comment on reproposed rules (the "Reproposed Rules") that would establish single counterparty credit limits for U.S. bank holding companies ("BHCs") and foreign banking organizations ("FBOs") with at least $50 billion in total consolidated assets.1  Pursuant to section 165(e) ("section 165(e)") of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Fed is required to prescribe rules that limit the amount of credit exposure that U.S. BHCs and FBOs can have to an unaffiliated company to reduce the risks that may arise from such a counterparty's sudden failure. In addition to the NPRM, the Fed also issued a white paper (the "White Paper") that provides the analytical and quantitative reasoning for the Reproposed Rules' more stringent 15% limit for credit exposures between systemically important financial institutions ("SIFIs").

The Fed originally proposed single-counterparty credit limits for U.S. BHCs and FBOs in December 2011 and December 2012, respectively (the "Originally Proposed Rules"),2  the Fed has issued the Reproposed Rules to take into consideration: (1) the extensive comments the Fed received in response to the Originally Proposed Rules; (2) the revised lending limit rules applicable to national banks;3  (3) the Basel Committee on Banking Supervision's introduction of large exposures standards;4  and (4) the results of quantitative impact studies and related analysis conducted by the Fed to gauge the impact of the Originally Proposed Rules.5

The Reproposed Rules represent another effort to reduce interconnectedness in the financial system. While the Fed has sought to gauge counterparty credit risk through annual stress testing of large financial institutions,6  the Reproposed Rules would establish hard limits on these exposures. Comments on the NPRM must be submitted to the Fed by June 3, 2016.

This alert is divided into four parts. Part I provides an overview of the general requirements under section 165(e). Part II highlights the requirements of the Reproposed Rules for both U.S. BHCs and FBOs. Part III provides a brief overview of the White Paper and discusses the Fed's justification for more stringent counterparty risk exposure requirements for SIFIs. Lastly, Part IV provides a chart summarizing several of the key requirements of the Reproposed Rules.

I. Section 165(e) of the Dodd-Frank Act

Under section 165(e), the Fed is required to establish single-counterparty credit limits for U.S. BHCs ("Covered Companies") and FBOs with at least $50 billion in total consolidated assets,78 While investment securities limits and lending limits are already in place for certain depository institutions, such as national banks, state-chartered banks, and state and federally chartered savings associations, pursuant to the National Bank Act of 1863 and the Federal Reserve Act, section 165(e) requires separate and independent enhanced single-counterparty credit limits.

The Dodd-Frank Act defines "credit exposure" to a particular company as:

  • all extensions of credit to a company, including loans, deposits, and lines of credit;
  • all repurchase agreements ("Repos"), reverse repurchase agreements ("Reverse Repos"), and securities borrowing and lending transactions with a company (to the extent that such transactions create credit exposure for the Covered Company or Covered Entity);
  • all guarantees, acceptances, and letters of credit (including endorsement or standby letters of credit) issued on behalf of the company;
  • all purchases of, or investments in, securities issued by the company;
  • counterparty credit exposure to the company in connection with derivative transactions between the Covered Company, or Covered Entity, and the company; and
  • any other similar transaction that the Fed determines, through regulation, to be a credit exposure under section 165(e).9

Covered Companies and Covered Entities are prohibited from maintaining credit exposure to any unaffiliated companies that exceeds 25% of the "capital stock and surplus" of the Covered Company or Covered Entity, or any such amount that the Fed determines may be necessary to mitigate risks to the financial stability of the U.S. economy.10  The Fed may additionally issue any such regulations and orders as it deems necessary to administer and carry out the requirements set forth under section 165(e), as well as exempt from the definition of "credit exposure" certain transactions if it finds that the exemption is in the "public interest and consistent with the purposes of section 165(e)."11 Lastly, the Fed is authorized to establish single-counterparty credit limits for any nonbank financial companies designated as a SIFI by the Financial Stability Oversight Council.12

II. The Reproposed Rules

The Reproposed Rules establish separate requirements for U.S. BHCs (i.e., Covered Companies) and FBOs and IHCs (i.e., Covered Entities), albeit the requirements are largely analogous. Specifically, the Reproposed Rules establish: (1) three levels of increasingly stringent credit exposure limits; (2) the methodology for calculating "aggregate net credit exposures"; (3) exemptions from the credit exposure limits; (4) compliance requirements; and (5) the timing in which Covered Companies and Covered Entities must comply with the Reproposed Rules' requirements.

A. Credit Exposure Limits for U.S. BHCs (Covered Companies)

Overview of Reproposed Rules as Applied to U.S. BHCs. Section 165(e) directs the Fed to impose single-counterparty credit limits on the "capital stock and surplus" of a Covered Company, which is defined under the Reproposed Rules as the "sum of the [Covered Company's] total regulatory capital as calculated under the capital adequacy guidelines applicable to that [Covered Company] under Regulation Q . . . and the balance of the [Covered Company's allowance for loan and lease losses ("ALLL")] not included in tier 2 capital under the capital adequacy guidelines applicable to that [Covered Company] under Regulation Q."13

Under the Reproposed Rules, the "aggregate net credit exposure" of a Covered Company to a single counterparty would be subject to one of three categories of credit exposure limits, each with increasing stringency. The Reproposed Rules define "aggregate net credit exposure" as the sum of all net credit exposures of a Covered Company or Covered Entity to a single counterparty.14 The below credit exposure limits would apply to a Covered Company on a consolidated basis, including any of the Covered Company's subsidiaries, to any unaffiliated counterparty:15

  • Category 1. The first category of limits would apply to Covered Companies with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures.16  Such Covered Companies would be prohibited from maintaining aggregate net credit exposure to an unaffiliated counterparty in excess of 25% of the Covered Company's total capital stock and surplus.17
  • Category 2. The second category of exposure limits would prohibit any Covered Company with at least $250 billion or more in total consolidated assets or at least $10 billion or more in total on-balance-sheet foreign exposures from maintaining aggregate net credit exposure to an unaffiliated counterparty that exceeds 25% of the Covered Company's tier 1 capital.18
  • Category 3. The third category of exposure limits would prohibit any Covered Company that is a globally systemically important banking organization ("G-SIB" or "Major Covered Company") from maintaining aggregate net credit exposure that exceeds (i) 15% of the Major Covered Company's tier 1 capital to any "Major Counterparty"19  and (ii) 25% of the Major Covered Company's tier 1 capital to any other counterparty.20

To view the full article please click here.


1 Board of Governors of the Federal Reserve System, "Single-Counterparty Credit Limits for Large Banking Organizations," Notice of Proposed Rulemaking, Mar. 4, 2016, available at http://www.federalreserve.gov/aboutthefed/boardmeetings/sccl-fr-notice-20160304.pdf, at 1.

2 See Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies; Proposed Rule, 77 Fed. Reg. 594 (Jan. 5, 2012); and Enhanced Prudential Standards and Early Remediation Requirements for Foreign Banking Organizations and Foreign Nonbank Financial Companies, 77 Fed. Reg. 76628 (Dec. 28, 2012).

3 See Lending Limits, 78 Fed. Reg. 37930 (June 25, 2013).

4 See "Final standard for measuring and controlling large exposures published by the Basel Committee," BIS Press Release, Apr. 15, 2014, available at http://www.bis.org/press/p140415.htm.

5 NPRM, supra note 1 at 7.

6 See Remarks by Chair of the Federal Reserve Janet L. Yellen, "Finance and Society" Conference, Washington, D.C., May 6, 2015, available at http://www.federalreserve.gov/newsevents/speech/yellen20150506a.pdf ("We are also employing annual stress tests to gauge large institutions' ability to weather a very severe downturn and distress of counterparties and, importantly, continue lending to households and businesses.").

7 Notwithstanding section 165(a)(2), the Fed has not proposed a threshold higher than $50 billion for applying section 165(e).

8 See 12 U.S.C. § 5365(e)(1).

9 See 12 U.S.C. § 5365(e)(3).

10 See 12 U.S.C. § 5365(e)(2).

11 See 12 U.S.C. § 5365(e)(5)-(6).

12 See NPRM, supra note 1 at 5.

13 See Reproposed Rule § 252.71(d).

14 See Reproposed Rule § 252.71(b).

15 A "subsidiary" of a Covered Company includes any "company that is directly or indirectly controlled by the specified company for purposes of the Bank Holding Company Act of 1956." NPRM, supra note 1 at 13 (citing 12 U.S.C. § 1841). However, the Fed notes that, to the extent an investment fund or vehicle is not controlled by a Covered Company, the exposures of such a fund or vehicle to their counterparties would not be aggregated to the Covered Company for purposes of the Covered Company's single-counterparty credit limits. See NPRM, supra note 1 at 13.

16 NPRM, supra note 1 at 11.

17 The Reproposed Rules defines "total capital stock and surplus" as the Covered Company's total regulatory capital plus ALLL.

18 NPRM, supra note 1 at 11.

19 A "major counterparty" is defined as a G-SIB or a nonbank financial company supervised by the Fed (i.e., a nonbank SIFI). NPRM, supra note 1 at 12.

20 Pursuant to Section 165(a)(1)(B) of the Dodd-Frank Act, the Fed may establish enhanced prudential standards based on factors such as "the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company." See 12 U.S.C. § 5323; and 12 U.S.C. § 5365(e). The establishment of enhanced credit exposure limitations for Major Covered Companies is consistent with section 165(a)(1)(1)(B) of the Dodd-Frank Act and discussed in further detail in Part III below.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.