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Fed Approves Rule to Prevent Risk Concentration Between Large Banks

June 18, 2018

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The Federal Reserve Board approved a rule to prevent concentrations of risk between large banking organizations and their counterparties from undermining financial stability. As demonstrated during the financial crisis, excessive exposure between the largest financial institutions spread contagion and eroded confidence in these institutions.

The final rule, which implements part of the Dodd-Frank Act, is generally similar to the proposal, and applies credit limits that increase in stringency as the systemic footprint of a firm increases. Like the proposed rule, a global systemically important bank holding company, or GSIB, would be limited to a credit exposure of no more than 15% of the GSIB’s tier 1 capital to another systemically important financial firm, reflecting Board staff’s analysis of the increased systemic risk posed when the largest firms have significant exposure to one another.

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