Pedestrians walk past a Citibank branch in Chicago, Illinois, U.S. (Photographer: Daniel Acker/Bloomberg)

Wall Street Banks to Face Fed Limits in Dealings With Each Other

(Bloomberg) -- Wall Street’s megabanks can expect new limits on how much credit exposure they can have to one another as the Federal Reserve prepares to approve long-delayed Dodd-Frank Act restrictions next week.

The so-called single-counterparty credit limit set for a final vote by Fed governors at a June 14 meeting was prescribed by lawmakers to keep banks from becoming as interdependent as they were before the 2008 financial crisis. A version proposed in 2016 would have capped a big bank’s credit exposure to any peer at 15 percent of tier 1 capital, a mark the Fed said the industry exceeded by about $100 billion at the time.

The Fed has made multiple stabs at the rule, having abandoned a more restrictive 2011 version for the latest one in 2016. The most recent proposal included restrictions on banks with as little as $50 billion in assets, but it’s not yet clear whether the regulator will continue its trend of easing rules for smaller lenders.

The limit was designed to “eliminate the threat that trouble at one big bank will bring down other big banks,” Former Fed Chair Janet Yellen said when the Fed proposed the rule more than two years ago. The credit crisis had demonstrated the dangers of letting the biggest financial firms get so intertwined that the collapse of one endangered the others -- as with the failure of Lehman Brothers Holdings Inc.

Yellen’s successor, Jerome Powell, has led recent efforts to rethink some of the Fed’s key banking rules, with help from Vice Chairman for Supervision Randal Quarles -- both appointed by President Donald Trump. They’ve said Dodd-Frank rules are ripe for revision.

The Office of Financial Research -- created at the Treasury Department to study risks to the financial system -- hatched a “contagion index” to measure the potential spillover of a lender’s collapse, and it ranked Citigroup Inc. and JPMorgan Chase & Co. among the most interconnected of the biggest bank holding companies. Still, industry lobbyists have argued that the regulators have overstated risks that had already been addressed by changes in practices, other rules and supervisory efforts such as the Fed’s annual stress tests.

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