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Fed rule targets risk concentrations among big banks

Joe Mont | June 15, 2018

Among the catalysts of the financial crisis, was the contagion and falling-domino effect caused by interconnectivity and excessive exposure among large financial institutions.

That interconnection, and the lessons learned from what went wrong, were the motivation for a new rule, approved by the Federal Reserve Board on Thursday, that is intended to prevent concentrations of risk between large banking organizations and their counterparties from undermining financial stability.

The final rule, which implements a mandate of the Dodd-Frank Act, applies credit limits that increase in stringency as the systemic footprint of a firm increases. A global systemically important bank holding company (GSIB) would be limited to a credit exposure of no more than 15 percent of the GSIB's tier 1 capital to another systemically important financial firm.

That threshold reflects the Fed’s...

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