Fed Approves Final Rule Setting Single Counterparty Credit Limit

The Federal Reserve Board today approved a final rule limiting the amount of credit exposure that the nation’s largest banks can have to each other and to other counterparties. Required under Section 165 of the Dodd-Frank Act, the single counterparty credit limits addressed in the rule would cover loans, derivatives, securities lending transactions and certain other transactions.

Under the final rule, a U.S. global systemically important bank holding company is limited to a credit exposure not to exceed 15 percent of its tier 1 capital to another systemically important financial firm. In addition, GSIBs are restricted to credit exposures of no more than 25 percent of tier 1 capital to all other counterparties. The rule also applies to foreign banks with $50 billion or more in total U.S. consolidated assets, with some tailoring to address, for example, how it applies if a similar rule is in effect in the home country. The rule takes effect Jan. 1, 2020, for GSIBs and July 1, 2020, for all other firms.

As advocated by the American Bankers Association, the rule incorporates common accounting definitions to simplify the application of exposure limits and permits exposure to be measured under risk-based capital rules.

While today’s rule only applies to GSIBs and bank holding companies with at least $250 billion in total consolidated assets — consistent with the tailoring instructions set forth in S. 2155, the new regulatory reform law — the Fed said it may consider in the future whether a credit exposure limit should be applied to holding companies between $100 billion and $250 billion in assets. For more information, contact ABA’s Hu Benton or Ananda Radhakrishnan.