US financials are tumbling after The Fed proposed a rule that would limit banks with $500 bln or more of assets from having net credit exposure to a “major counterparty” in excess of 15% of the lender’s tier 1 capital. Bloomberg reports that The Fed's governors plan to vote today on the proposal. The implications of this are significant in that it will force some banks to unwind exposures and delever against one another (most notably with potential affect the repo market which governs much of the liquidity transmission mechanisms). Guggenheim's Jaret Seiberg warns the proposal is likely to be "stringent," though less onerous than the Dec 2011 proposal.
- *FED ISSUES PROPOSAL ON BANK INTERCONNECTEDNESS IN STATEMENT
- *FED TO PROPOSE BIG BANKS CAP CREDIT RISK TO EACHOTHER AT 15%
- *BANKS WITH $500 BLN OF ASSETS WOULD FACE 15% LIMIT UNDER RULE
JPMorgan is tumbling...
As Bloomberg reports,
Wall Street giants such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. would face new limits on credit exposure to any other large financial company under a Federal Reserve proposal set for a vote Friday.
The rules, which would limit such exposures to 15 percent of a lender’s Tier 1 capital, are meant to ensure megabanks won’t take others with them if they fail. The Fed is making a second effort after abandoning a 2011 proposal that called for a cap at 10 percent. Even so, the central bank estimates the largest institutions would have to dial back their exposures by almost $100 billion to get below the 15 percent mark.
“The credit limit sets a bright line on total credit exposures between one large bank holding company and another large bank or major counterparty,” Fed Chair Janet Yellen said in a statement. The proposal targets the problem of big-bank connectedness that magnified the 2008 financial crisis, she said.
The earlier proposal was shelved after the Fed received strong criticism from the banking industry, and the new version more closely matches an international agreement on a 15 percent cap for the biggest institutions. The strictest limits affect only the U.S. banks deemed systemically important and foreign banks with more than $500 billion in the U.S. Two lower tiers of banks would face lesser limits, with lenders between $50 billion and $250 billion in assets facing the 25 percent cap outlined in the 2010 Dodd-Frank Act.
“While regulatory reform and better risk management practices have reduced interconnections among the largest financial firms by roughly half from pre-crisis days, it is important to put safeguards in place to help prevent a return to those prior practices,” said Daniel Tarullo, the Fed governor in charge of regulation.
JPMorgan, Citigroup and Morgan Stanley argued that the earlier proposal overstated risk and would hold back the economy. Goldman Sachs more specifically warned that it could destroy 300,000 jobs. The Bank of Japan said a similar rule affecting foreign firms could hurt liquidity of high-quality sovereign debt.
The Federal proposal on single-counter-party credit limits for SIFI banks, due later, likely to be “stringent,” though may be less onerous than Dec. 2011 proposal, Guggenheim’s Jaret Seiberg writes in note.
The Fed is holding an open board meeting to discuss the proposal: