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Board of Governors of the Federal Reserve System
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Federal Reserve Board of Governors

Opening Statement on the Proposed Rule Establishing Single-Counterparty Credit Limits for Large Banking Organizations by Governor Daniel K. Tarullo

Limits on commercial bank lending to a single borrower are a fundamental and longstanding element of prudential regulation. The proposed regulation before us today would extend this safeguard by applying limits on the combined exposures to a single counterparty within all parts of large bank holding companies. The regulation would complement overall capital requirements, which are generally based on the size and nature of a bank's assets and do not address the risks of concentrated exposures to specific borrowers or counterparties.

A few points are particularly worth highlighting:

First, this rule would apply only to the financial firms covered by section 165 of the Dodd-Frank Act--that is, bank holding companies with $50 billion or more in assets. Bank holding companies below the $50 billion threshold are entirely exempt.

Second, as has been our practice in our regulations implementing Dodd-Frank provisions related to these large banks, the proposed rule would impose increasingly tighter limits as their systemic significance increases.

  • For banks between $50 and $250 billion in assets, the regulation proposes to impose only the minimum requirement established in the statute--that is, a limit on aggregate net credit exposure to any one counterparty of 25% of all regulatory capital.
  • For banks with $250 billion or more in assets, the proposal would use the authority granted in the statute to impose a stricter limit--specifically, by basing the 25% limit on Tier 1, rather than all, regulatory capital.
  • Finally, the eight domestic G-SIB banks and foreign banks with more than $500 billion of assets in their U.S. holding companies would have an additional limit of 15% of Tier 1 capital on exposures to one another and to other systemically important financial firms--namely non-bank SIFIs designated by the Financial Stability Oversight Council and foreign G-SIBs.

Third, staff conducted substantial empirical analysis in preparing this proposal, including a quantitative impact study to help gauge its likely effects. The white paper that accompanies the proposal sets forth both the conceptual and quantitative foundations for the tighter limits that will apply to G-SIBs. Staff estimates that almost all of the roughly $100 billion in current exposures among domestic firms that would exceed these limits is attributable to exposures among G-SIBs.

While regulatory reform and better risk management practices have reduced interconnections among the largest financial firms by roughly half from pre-crisis days, it is important to put safeguards in place to help prevent a return to those prior practices. Indeed, the broader issue of common large counterparty exposures among the largest banks is one that we should bear in mind as we continue to develop the macroprudential features of our annual stress tests and capital assessments.

Last update: March 4, 2016