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Fed to Unveil New Rules Aimed at Corralling Banks’ Risk 

March 7, 2016

Donna Borak and Ryan Tracy

Policy makers are poised to unveil a new plan Friday that seeks to restrain how quickly risk can spread among the country’s biggest banks.

The Federal Reserve’s revised proposal will be the central bank’s latest step to minimize the systemic risk posed by the biggest banks—not based on size, but on interconnections with other large firms—by limiting how much exposure institutions may have to each other and to their counterparties.

Despite its potential significance to stem contagion in financial markets, the rule—known as the single counterparty credit limit—has spent years on the back burner. Until now, regulators had been focused largely on other high-profile rules tied to capital, liquidity and other curbs on risk-taking.

Interconnectedness between the biggest banks was one of the key problems policy makers identified after the 2008 financial crisis, when the collapse of a single investment bank—Lehman Brothers Holdings Inc.—threatened many other large Wall Street firms that had lent to the firm.

“If you actually think about what risk is—and really what systemic risk is—concentration risk is a huge risk driver, whether it’s subprime [lending], or really a big exposure to a single borrower,” said Karen Shaw Petrou, managing director at Federal Financial Analytics Inc. “That’s what the rule is designed to capture.” Read more

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