Bloomberg News

Largest U.S. Banks Resist Federal Reserve’s Credit Limits

April 27, 2012

The Goldman Sachs Group Inc. headquarters in New York. Photographer: Jin Lee/Bloomberg

The Goldman Sachs Group Inc. headquarters in New York. Photographer: Jin Lee/Bloomberg

The largest U.S. banks, including JPMorgan Chase & Co. (JPM:US) and Goldman Sachs Group Inc. (GS:US), told the Federal Reserve that a limit on their credit exposure is unnecessary and “fundamentally flawed.”

The Fed’s proposed rules on single-counterparty credit limits would have a negative impact on banks, their customers and the U.S. economy, according to a letter sent to the central bank today by five banking trade groups, including the Clearing House Association.

In December, the Fed proposed tougher standards to supervise the largest banks whose collapse could jeopardize the economy. The central bank set a limit of 10 percent for credit risk between a company considered systemically important and counterparty when each has more than $500 billion in total assets.

“The Federal Reserve has provided no basis to determine that imposing the dramatically lower and arbitrary 10 percent credit limit on certain major covered companies would even help mitigate risks to the U.S. financial stability, much less be necessary,” according to the text of the letter obtained by Bloomberg News.

Other signers of the letter are the Financial Services Roundtable, the Securities Industry and Financial Markets Association, the Financial Services Forum and American Bankers Association. The Clearing House also represents Citigroup Inc. and Bank of America Corp. (BAC:US) in addition to JPMorgan.

Fed Proposals

The Fed’s proposed rules would set triggers for regulatory enforcement for systemic firms and require boards of directors to oversee and approve plans for limiting liquidity risk. Comments on the Fed’s proposal are due on April 30.

The 10 percent credit risk limit is more restrictive than that contained in the Dodd-Frank financial overhaul law, which allowed for a 25 percent limit.

The banks are focusing their complaints on the proposal on the single-counterparty exposure limit. They argue it goes too far without justification from the Fed for its change. Further, they disagree with the central bank on its proposed formula for determining counterparty exposure.

The banks are attempting to bring heightened attention to the issue, in a fashion similar to the resistance to the Volcker rule’s ban on proprietary trading, and are beginning a push to get lawmakers’ input. Executives of the eight largest banks met with Fed Governor Daniel Tarullo on March 27, according to a Fed disclosure.

Important Implications

“This hasn’t gotten the attention of Volcker but its implications have been just as important,” said Satish Kini, co-chairman of the Debevoise & Plimpton LLP’s Banking Group.

Banks were subject to single counterparty limits prior to the financial crisis at the bank level not the holding company level. This proposal extends the authority to the holding company of institutions. The Fed has said this change is to address the links between firms considered systemically important.

“The financial crisis also revealed inadequacies in the U.S. supervision approach to single counterparty credit concentration limits, which failed to limit the interconnectedness among and concentration of similar risks within large financial companies that contributed to a rapid escalation of the crisis,” the Fed said in its December proposal.

The Fed did not explain why it changed the credit risk limit to 10 percent for the largest banks. The Dodd-Frank act allows the Fed to make the change if it determines it is necessary to “mitigate risks to the financial stability.” The banks argue the Fed should first try the 25 percent limit and, if it proves inadequate, adopt the 10 percent limit.

“Going beyond the 25 percent limit based on an array of untested, an unknown factors is over engineering,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm whose clients have included Wells Fargo & Co. (WFC:US) “Throughout the rule there are really important improvements that ought to be put in place, kick tested and then expand it.”

To contact the reporters on this story: Cheyenne Hopkins at Chopkins19@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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Companies Mentioned

  • JPM
    (JPMorgan Chase & Co)
    • $59.17 USD
    • 0.17
    • 0.29%
  • GS
    (Goldman Sachs Group Inc/The)
    • $176.26 USD
    • -0.56
    • -0.32%
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