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Fed's post-crisis rule on contagion risk targets European, other foreign banks

The U.S. Federal Reserve has big European and other foreign lenders in its scope as it finalizes a post-crisis rule to prevent banks' exposure to a single counterparty, giving companies until 2020 to comply.

The bank regulator said June 14 that foreign banks with $250 billion or more in total global consolidated assets operating in the U.S. would be restricted to a net credit exposure of no more than 25% of their Tier 1 capital to a single competitor. Foreign banks' intermediate holding companies with $50 billion or more of U.S. assets would be similarly restricted. However, the Fed said it will now consider to what extent credit exposure limits should apply to U.S. bank holding companies with between $100 billion and $250 billion of assets at a later date.

Among the entities affected are HSBC North America Holdings Inc., Barclays US LLC, BNP Paribas USA Inc., UBS Americas Holding LLC, Credit Suisse Holdings (USA) Inc. and DB USA Corp. HSBC's operation has over $200 billion in total assets while the others all have over $100 billion.

This, the Fed said in its notes on the rule, "promotes equality of competitive opportunity, since they represent one portion of a significantly larger banking organization."

U.S. banks with $250 billion or more in assets but not deemed global systemically important banks would also be restricted to a credit exposure of 25% of their Tier 1 capital.

However, the rule is more restrictive when applied to the eight U.S. global systemically important banks, which include Goldman Sachs Group Inc. and Citigroup Inc. These banks would be limited to a credit exposure of no more than 15% of their Tier 1 capital to another systemically important firm.

The rule was introduced under the 2010 Dodd-Frank financial reforms and was first drafted in 2016 but has yet to be put into effect. It aims to limit the spread of contagion, which saw banks shudder because of their large exposure to each other.

The Fed said the rule was consistent with the recently passed Economic Growth, Regulatory Reform and Consumer Protection Act since the rule's limits will apply to the biggest U.S. banks and holding companies with at least $250 billion in total consolidated assets.

"The final rule adds to the robust capital and liquidity positions of the financial system today by setting out clear limits on credit exposures among the largest banking firms," said Fed Vice Chairman Randal Quarles. "I am pleased by the final rule's efficient approach to setting limits that are appropriately adjusted for firms of lesser systemic importance."

The global systemically important banks will have to comply with the requirements by January 1, 2020, while other banks affected have until July 1, 2020, to comply.

The Fed said the rule reflected its analysis of the increased systemic risk posed when the biggest banks lend each other significant amounts, so that the failure of one bank does not pose a major risk to the survival of another.

Fed Chairman Jerome Powell said at a June 14 Board of Governors meeting that the financial crisis had illustrated the risks that interconnections between the biggest financial institutions posed, noting that "they can threaten the stability of the financial system."