Fed Proposes Counterparty Exposure Limits for Large Banks

The Federal Reserve last week proposed to establish aggregate credit exposure limits for banks and holding companies with more than $50 billion in assets. The exposures addressed would include loans, derivatives, securities lending transactions and others. Required under Section 165 of the Dodd-Frank Act, the proposal significantly revises the Fed’s 2011 proposal on the topic and takes into account the framework proposed by the Basel Committee on Banking Supervision in 2014.

For banks with less than $250 billion in assets and less than $10 billion in on-balance-sheet foreign exposures, aggregate net credit exposure to unaffiliated counterparties would be capped at 25 percent of the institution’s total capital stock and surplus. A second, more stringent limitation would prevent banking institutions with more than $250 billion or more than $10 billion in on-balance-sheet foreign exposures, but that are not global systemically important banks, from having exposures exceeding 25 percent of tier 1 capital or in excess of 25 percent of the institution’s tier 1 capital to any other counterparty.

Finally, a G-SIB’s exposure to another G-SIB or nonbank systemically important financial institution would be capped at 15 percent of tier 1 capital. Comments on the proposal are due by June 3. For more information, contact ABA’s Hu Benton or Jason Shafer.