(Bloomberg) -- The Federal Reserve is set to impose limits on big banks’ credit exposure to one another with a new rule that has been eased so much that all of Wall Street is already generally in compliance.
The single-counterparty credit limit -- required by the 2010 Dodd-Frank Act as a way to keep a future crisis from spreading -- is set for a Fed board vote on Thursday. The long-awaited measure reflects a modification from a 2016 version that would have required banks to dial back their exposures to each other by as much as $100 billion.
The Fed has narrowed the rule to primarily affect banks with more than $250 billion in assets instead of those with more than $50 billion, which would have encompassed some smaller regional banks. It also has tweaked its measurement methods to reduce the exposure math for the affected firms.
The rule aims to head off a repeat of the disastrous failure of Lehman Brothers Holdings Inc., which was entangled with other Wall Street firms during the 2008 credit meltdown.
“This final rule is another step in sustaining an effective and efficient regulatory regime that keeps our financial system strong and protects our economy while imposing no more burden than is necessary to get the job done,” Fed Chair Jerome Powell said in a statement. The planned constraints had already been weakened over the years since an initial 2011 proposal, and the final limits are in line with efforts from President Donald Trump’s appointed regulators -- including Powell and Fed Vice Chairman for Supervision Randal Quarles -- to ease the burdens of bank regulations.
The Fed plans to cap a global bank’s credit exposure to any of its peers at 15 percent of its tier 1 capital -- matching the 2016 proposal. But the calculations of credit exposure have been simplified to the benefit of the banks, putting their newly assessed exposures well under the limit, with the Fed estimating that “the draft final rule is unlikely to have a material impact” on the affected firms. Specifically, the rule would let banks use internal models to tally “securities financing transactions” -- a major part of their exposure.
The Fed’s rule, based on international agreements and a provision of Dodd-Frank, could be changed to add limits for banks between $100 billion and $250 billion in assets, the agency said. And the institutions under the new regulation will likely face a new filing requirement to show their ongoing exposures, with the Fed now working to set up that system.
Big foreign banks in the U.S. would also be required to meet the credit limits, but the final rule adds an ability for them to comply by assuring the Fed that their home regulators already hold them to a similar standard.
Virtually all derivatives contracts in the U.S. banking system are concentrated among the largest firms, and other big banks are their main trading partners. That interconnectedness was especially revealed in the 2008 crisis, when the U.S. government had to step in to keep investor panic from spreading through the financial system.
Wall Street lobbyists have argued that regulators have overstated risks already dealt with over the years by changes in how the banks do business, the implementation of other rules and supervisory efforts such as the Fed’s annual stress tests.
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