Stocks Tumble After Fed Plans Too-Big-To-Fail Bank Counterparty Risk Cap

Tyler Durden's picture

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.


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:

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max2205's picture

they mean it this

Soul Glow's picture

Damn and everyone had bought the the dip and headed out for the weekend.  Sucks to be a bull.


BoNeSxxx's picture

....and gold gets monkey hammered into the close

Stackers's picture

from having net credit exposure

Key word in there is "net"..... becuase of course 99.999% of the quadrillion in derivatives out there on bank book's is all cross netted out hedge positions...

Urban Redneck's picture

"Gross" exposure is actually even more unfriendly (and apt) to the banksters... since ISDA estimates gross credit exposure to substantially less than 1/2 of 1% of the corresponding notional value.

Or put another way, in the event of a counter-party default (and the forced recognition of notional value) - that cap on single counter party exposure that was supposedly 15% of tier 1 capital can instantly become well over 3000% of tier 1 capital.

They're just putting lipstick on a pig, in the event of another failure of CONfidence only unlimited bailouts and letting the banksters mark their books to whatever myth they want could preserve the status quo.

macholatte's picture

They have been jawboning about the same thing since Dec. 2011 and accomplished nothing??

Did I get that right?


What would happen if Trump were on the Fed board?

Beatscape's picture

I suggest a common sense starting point: banks aggregate counter party risk cannot exceed the annual GDP of the US. 

ThroxxOfVron's picture

I suggest that any group of banks' aggregate counterparty risk should be limited to the sum of the aggregate GAAP profits of those banks from the preceeding year sans any tax games with losses, etc.  

Gambling/speculating with sums in excess of all yearly income is insane.

Let the banks gamble with their own money and leave the taxpayers and .GOV out of their games.


Put the derivatives on the balance sheets and enforce captial ratios.


End corporate shielding of wrongdoing.  Prosecute criminal activity at all levels and extract/claw-back ill-gotten gains.

Prosecute the banksters and regulators that fail to act against back-dating, money-laundering, book cooking, etc....

Employ prompt corrective action and corporate capital punishment where system fraud/malfeasance is discovered or insolvency looms.

LawsofPhysics's picture

You sir, are a supreme optimist!!!

silver surfer's picture


For simple and effective solutions to fraud and injustice seek out Zero Hedge comment section!

ThroxxOfVron's picture

Beatscape's idea that Banks should be allowed to gamble with sums equal to the entire GDP of the US is insane.

"The US corporate default rate, according to Standard & Poor’s Global Fixed Income Research, soared from 2.8% in January to 3.3% in February, a big jump for just one month, and the highest rate since December 2010, when it was recovering from the Financial Crisis, with QE and ZIRP running at full bore, and with banks and big corporations getting bailed out by the Fed and the Treasury.

And it’s higher than it had been during the early phase of the Financial Crisis in September 2008, when Lehman Brothers filed for bankruptcy, when all heck was breaking lose, when stocks and bonds were plunging, and when the default rate was “only” 2.96%.

But this time it’s different, they reassure us. In December 2007, the default rate was 1.02%. At the time, banks were already cracking at the seams. Bear Stearns would soon pop. The Financial Crisis was visible on the horizon. And the economy entered what would later be called the Great Recession. By November 2009, nearly two years later, the default rate peaked at 12%. "


At the peak of the GFC certain NPLs peaked at over 12%.

"Oh, gee; they only fucked-up and lost 12% of GDP this quarter.



...AND the whole financial system turned to diarrhea!


ThroxxOfVron's picture

12% NPLs sounds bad, right??

That is exactly what the level is of Non-Performing MORTGAGES are in MY community right now today according to Zillow.

...AND this community is an oasis of prudence and stability.


TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Mar 4, 2016 3:07 PM

Proposed just means "I want more money" in political speak

indygo55's picture

This whole system is onerous. I wish it would just take a giant shit and get it over with. 

buzzsaw99's picture

it's all an act. the fed doesn't care about anything but their own retroactive bribes.

LawsofPhysics's picture

Oh, so now things like counterparty risk are important?  LMFAO!!!

Before we continue motherfucker, I am afraid I will need to make sure you and your debt notes are in fact solvent/good.  In short, I need you to open those vaults and show me the collateral motherfuckers!!!!

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) LawsofPhysics Mar 4, 2016 3:12 PM

I thought that with the "Fed Put" the end counterparty of all financial transactions was the Fed itself (for TBTF banks at least).  If things ever get to shaky they will open their coffers to keep the system afloat as they have for the past 8 years

LawsofPhysics's picture

that will "work" only as long as the FRN is still accepted.  The Fed must now defend the FRN, period.

buzzsaw99's picture

you thought right. the fed guarantees all couterparties of the tbtf including europe's tbtf.

Arnold's picture

In for a penny, in for a pound.

Taxpayers responsible for bank holdings unzippered derivatives.

tarsubil's picture

They have this like really huge vault full of faith and credit. What more can you ask for? Is there no pleasing you people?

LawsofPhysics's picture

I hear people often say, "how could anyone really be the one to drop the guillotine on anyone else, who dare cast such a stone"...

As former military, along with my father and grandfather and numerous other souls who have died, only to see the republic hiijacked.  Mitt does not know what powers he is fucking with. I can assure you I will have no problem taking these fuckers heads.  I am not alone, I made my peace with God a long time ago.

Haraklus's picture

It's right on the fed balance sheet's under goodwill:
 4.5 Trillion

BigDawgz's picture

I thought those vaults were full of "hope and change".


Come to find out, they're just full of it & I'm left hoping I have some change when they're done screwing everyone.

EscapeKey's picture

wouldn't even be an issue had they broken up the TBTFs

buzzsaw99's picture

yep. they are still tbtf which means automatic bailouts at the first sign of trouble even after they used all the loan loss reserves for bonuses.

edit: the real funny part was they griped about onerous regulations the whole time they were looting the banks.

Arnold's picture

If the Kamakazi Black Swan dominoes several or more  of the Fed's Primary Dealers, this isn't going to be much more than chintz window dressing.

Unnecessarily complex way to end the Fed.

Catullus's picture

I.e. Duetche Bank.

BlueStreet's picture

Nasdaq breakout at 1:40 also failed. 

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) BlueStreet Mar 4, 2016 3:14 PM

This dip is just a pause before Monday's ass shreading that puts the S&P 500 above 2025.  The Fed always likes to make it look like there is a market so things always pause a bit before the next rip (to appear to be profit taking)

BlueStreet's picture

IMO the best selling opportunity since May 2008. 2025 would be even better. Guess that's what makes a market.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) BlueStreet Mar 4, 2016 3:24 PM

Yup, there are zero reasons for investors to be rushing back into the market right now.  The economy is stinking like a corpse but its been years since this market should have collapsed out, who knows how long they keep this thing floating.  As last year struggled on I really felt the market would be in the 1700s at least by this time in 2016, equity and debt issuances seem to just keep on flowing from somewhere though.  The money is always there when the market needs it, somehow

BlueStreet's picture

Agree but chart setup is very different this year. It mimics May 2008 with the added confirmation that we had that plunge last aug/sept and then retested the high and that failed. The charts don't get much better than they are right now for the bears IMO. If we break above 2050 I'd throw the towel in but at 2025 I'd take a cash advance on my credit card to add to my shorts. Joking, but just about. 

Clowns on Acid's picture

Bring back Glass Steagal. Admit that Rubin, Summers, and Weill were crooks and prosecute them. Lets get this over with.

ThroxxOfVron's picture

"Bring back Glass Steagal. Admit that Rubin, Summers, and Weill were crooks and prosecute them. Lets get this over with. "

Agreed...with one caveat:

Bill Clinton was their frontman, he goes into the woodchipper with them.

economessed's picture

You get the green triangle press for advocating use of the woodchipper.

We use traditional methods of human extermination (guns, bombs, electric chairs, etc.) for criminals who intentionally cause harm to other humans.  But we should reserve the woodchipper for disposing of white collar criminals who have served their own interests with such greed and perversion at the expense of their fellow citizens.  And if there were any doubt, all trips through the woodchipper must be undertaken feet first.

Haraklus's picture

I disagree about "all trips" being feet-first.


If they testify against their compatriats in court, they can go in head first.


If it's a lousy testimony, they have to swan dive in with their hands in front of their heads.

petroglyph's picture

Them, and their little fucking dog

Peak Finance's picture

This is truly insane.

The fact that a bank would have 15% of it's eggs in one basket is actually scary.

Risk management is non-existant

LawsofPhysics's picture

what is this "risk" you speak of, we have a printer/computer and the "entitlement/authority to make as much "money" as we want...



tick tock motherfuckers...

EscapeKey's picture

well, when you consider there's only really 5 major banks left in the states...

petroglyph's picture

If they merge, then there won't be any counterparty risk, simple.

"The fed proposes", who owns the fed?

Arnold's picture

The large banks don't know where to get return for investment either.

Its not just for muppets anymore.

Haraklus's picture

I love that I'm smarter* than Goldman Sach's

*smaller, and therefore able to profit from smaller arbitrage opportunities 

fishbum2's picture

It'll help. Top 4 banks have $174 TRILLION in derivatives, top 25 banks have $192 TRILLION, that's right TRILLIONS.

Look here : . See Table 1 & 6, towards the end of the report, and remember a million million is a Trillion.

Soul Glow's picture

Obama's polishing the brass on the Titanic, it's all going down man!

Arnold's picture

Just the knobs.


(hadda write it.)

Old Bag Lady's picture

Does this deck chair make my butt look big? At least the life jacket should balance it out.

Seasmoke's picture

Get to work Mr. Yellen.

besnook's picture

this is a prebubble pop aimed at a measured release of air. it will fail because the fed, itself, probably has no idea of the depth of entanglement.