Fed sets limits on biggest banks' loans to each other

By Marcy Gordon
AP Business Writer

WASHINGTON (AP) - The Federal Reserve has set limits aimed at addressing one of the leading causes of the 2008 financial crisis - the buildup of loans extended by one bank to another among the biggest Wall Street institutions.

At a meeting last Thursday, the Fed governors adopted a new rule that caps a big bank's credit exposure to another bank. The rule is close to a proposal the central bank floated two years ago, but it makes revisions for the credit limits to be tailored to the size of the bank. That's in line with the Fed's current approach to regulation under new leaders appointed by President Donald Trump.

The aim of the rule, applied to banks with assets of $250 billion or more, is to help bolster the stability of the financial system. The hope is to prevent a repeat of the crisis that engulfed the financial system in September 2008 when the collapse of Wall Street powerhouse Lehman Brothers raised fears over the stability of banks that had made loans to Lehman.

The Fed oversees Wall Street titans such as JPMorgan Chase & Co., Goldman Sachs & Co., Bank of America Corp. and Citigroup Inc. The banks are considered to be so huge and interconnected that each could threaten the financial system if it collapsed.

"The financial crisis showed that interconnections between our largest and most complex institutions - for example, lending and borrowing between such firms - can threaten the stability of the financial system," Fed Chairman Jerome Powell said before the vote. He said the new rule "will limit these exposures and their associated risks."

The affected banks will have between 18 and 24 months to comply with the new limits and to start reporting their loan exposures to the regulators.

Fed officials said the banks will have little difficulty meeting the new limits. They estimated in 2016 that their total credit exposure over the limits was less than $100 billion.

The rule changes the Fed's 2016 proposal by sharply raising the threshold of banks subject to the credit limits: to $250 billion in assets from $50 billion. That reflects major legislation recently enacted by Congress and signed into law by Trump, which raised that threshold for requirements on how much capital banks must keep as a cushion against unexpected big losses.

Under the rule, the very largest banks must limit their credit exposure to another big bank to 15 percent of their safest capital, known as Tier 1 capital.

The rule was ordered by Congress under the 2010 Dodd-Frank law, enacted by President Barack Obama and Democrats in Congress to tighten regulation after the crisis that sparked the Great Recession that cost millions of Americans their jobs and homes. The law aimed to restrain banks - which received hundreds of millions in taxpayer bailouts - from the kind of reckless practices that many blamed for the crisis.

The Fed's action was the latest move by federal regulators to ease or revise rules and protections that were tightened after the financial meltdown. Trump has pushed for such changes, arguing that the stricter regulations have constrained lending and economic growth.

The Trump administration has sharply scaled back the authority and reach of the Consumer Financial Protection Bureau, which was established to safeguard consumers against abuses by credit card issuers, payday lenders, mortgage servicers and debt collectors.

Last month, the Fed proposed changes that would give the largest banks leeway to take riskier trading bets for their own profit. The changes would loosen restrictions that since the crisis have barred big banks from using depositors' money to make sizable financial bets. They would give Wall Street greater ability to engage in profit-making trades.

The Fed is an independent regulator that asserts its separation from political pressure and the White House. Trump, though, has had an unusual opportunity to put his stamp on the central bank by filling several key positions on the seven-member Fed board. Four of those positions have yet to be filled, and some of Trump's nominees are awaiting Senate confirmation.

Published: Mon, Jun 18, 2018