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Federal Reserve: New Rule to Prevent Another Lehman Fail 

May 10, 2016

Jason Graul, Business Financial News

The Federal Reserve in a press release on Tuesday proposed a rule which would give the financial system more stability in the US and to prevent another potential collapse. The Federal Reserve already implemented the stress test to check the financial stability of major corporations since 2009, but the new rule would not allow firms to immediately cancel loan contracts in the event of bankruptcy proceedings of large banks.

Under the new rule, the global systematically important banking institutions (GSIBs) including foreign GSIBs operating in the US would need to amend their contracts. The amendment would include the banks to prevent from immediate cancellations of the contracts in the event of the firm entering bankruptcy. The press release states: “This change should reduce the risk of a run on the solvent subsidiaries of a failed GSIB caused by a large number of firms terminating their financial contracts at the same time.”

The proposal is amongst the latest efforts by the Federal Reserve to end ‘too big to fail’ institutions by taking measure to prevent another collapse without burning the taxpayers’ money or exposing the financial system. Read more

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