Obscure Provision In Reg Reform May Have Big Impact

By Stacy Kaper



A little-noticed provision tucked into regulatory reform legislation by the Treasury Department is causing a furor among large institutions, which say it would effectively ban all derivative transactions between banks and their affiliates. While the Obama administration argues the provision would make the system safer, bankers say it would do the exact opposite by preventing them from using a risk-reduction tactic blessed by regulators. Karen Shaw Petrou, the managing director of Federal Financial Analytics, said that the Treasury provision makes sense from a policy perspective since it would address credit exposures that are not currently covered.”What Treasury did was rightly recognize that credit risk now comes in many other ways,” she said. “That is a business model changer, and one of the reasons credit risk comes in many other ways is that those ways invaded the old controls designed to curb particularly concentration risk. … The real effort here is to deal with real risk.” The administration also argues the provision would force large financial conglomerates to become less complex, making it easier to isolate and handle problem units without jeopardizing the bank.