Federal Reserve Adopts Single Counterparty Credit Limits
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Key takeaways
- On June 14, 2018, the Federal Reserve Board published its final rule implementing the single counterparty credit limits mandated by the Dodd-Frank Act. These limits are a response to concerns that interconnections among large banking organizations and their counterparties can have cascading effects during times of stress, which can threaten financial stability.
- The final rule reflects reforms to the Dodd-Frank Act made by the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, which, among other things, increased asset size thresholds that trigger applicability of the Dodd-Frank Act’s enhanced prudential standards (including the single counterparty credit limits).
- The basic requirement of the final rule is to limit the “net credit exposures” of covered firms to a single counterparty to a specified percentage of the firm’s eligible capital base. The percentage for the credit limit and the eligible capital base against which the credit limit is measured vary depending on the size and regulatory status of the covered firm. Foreign banking organizations have the option of complying with respect to their combined U.S. operations by certifying that they are subject to equivalent home country standards; however, U.S. intermediate holding companies separately are subject to the final rule.