Federal Reserve Adopts Final Rule for Single Counterparty Credit Limit
On June 19, the Federal Reserve adopted a final rule that sets overall single counterparty credit limits for global systemically important banking entities (GSIBs) and US bank holding companies with at least $250 billion in total consolidated assets.
The new rule implements section 165(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the Federal Reserve to impose limits on the amount of credit exposure that such a bank holding company or foreign banking organization can have to an unaffiliated company in order to reduce the risks arising from the company’s failure.
Under the final rule, a US GSIB is prohibited from having aggregate net credit exposure to another GSIB in excess of 15 percent of its tier 1 capital. For exposure of a GSIB to a non-GSIB counterparty or any single counterparty exposure of a bank holding company with total consolidated assets of $250 billion or more that is not a GSIB, that limit increases to 25 percent. The rule also applies to foreign banking organizations operating in the US with at least $250 billion in total global consolidated assets (as well as their intermediate holding companies with $50 billion or more in total US consolidated assets).
GSIBs will be required to comply with the new rule by January 1, 2020. All other firms are required to comply by July 1, 2020.
The rule, which takes the form of a new Subpart H for Regulation YY, is available here.