Fed Rules Redefining Bank Oversight to Be Issued This Week

By Cheyenne Hopkins
The Federal Reserve will issue capital and liquidity rules this week reshaping supervision of the riskiest, largest banks and those with more than $50 billion in assets, a government official familiar with the matter said.  The Dodd-Frank Act requires the Fed to impose heightened standards including stricter capital levels for banks with over $50 billion in assets whose failure would threaten the financial system and similar non-bank institutions. The stricter standards also target liquidity, risk management structure, credit reporting, concentration limits, stress tests, contingent capital and short-term debt limits. Bair’s Preference –  “Regulators’ primary focus should be constraining absolute leverage through an international leverage ratio that is significantly higher” than the Basel Committee’s proposed 3 percent standard, former Federal Deposit Insurance Corp. Chairman Sheila Bair said in Dec. 7 testimony.   To address the relationships between systemic institutions, Dodd-Frank directs the Fed to issue rules limiting the credit exposure one company has to another significant institution and curb such exposure to unaffiliated companies to 25 percent of total capital, impacting banks’ derivatives and securities trading.  ”It’s a huge, big change on the interconnectedness on systemic risk,” said Karen Shaw Petrou, managing director of Federal Financial Analytics Inc. ”These credit exposure limits will be the first global effort to contain those risks and it’s another franchise redefining for the biggest, most complex, banks.”