Federal Reserve finalizes
rules to help unwind big banks
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[September 02, 2017]
By Michelle Price and Pete Schroeder
WASHINGTON (Reuters) - The Federal Reserve
on Friday finalized a new rule that should make it easier to wind down
systematically important U.S. banks by creating a safe harbor for
financial contracts after a firm defaults.
The decision, unanimously approved by Fed board members, forms part of
global post-crisis efforts to end 'too big to fail' institutions that
are so large and complex they could endanger the entire financial system
if they fall into bankruptcy.
The rule requires global systematically important banks (GSIBs) to amend
the language in common financial contracts so they cannot be immediately
canceled if the firm enters bankruptcy.
By imposing new legal protections, regulators aim to prevent a run on a
GSIB's subsidiaries that could be triggered if a large number of
counterparties rush to terminate their contracts, as occurred in the
case of Lehman Brothers in 2008.
The new rules would apply to eight GSIBs, including JPMorgan Chase
<JPM.N>, Goldman Sachs <GS.N>, and Citigroup <C.N>.
As GSIBs sign a huge number of such deals, typically worth hundreds of
billions of dollars, a market panic to terminate them could potentially
drag down other institutions.
“The financial crisis showed that when a large financial institution
gets into trouble, its failure can destabilize other firms and the
broader financial system,” Fed Chair Janet Yellen said in prepared
remarks at an open hearing on Friday.
“This requirement will help manage the risk to the financial system when
a GSIB fails.”
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A view shows the Federal Reserve building on the day it is scheduled
to release minutes of the Federal Open Market Committee from August
1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing
The rule applies to a range of products, including derivatives, securities
lending deals, and short-term funding agreements, that are privately negotiated
rather than processed through a central clearing house.
But in a nod to the efforts of U.S. President Donald Trump's administration to
ease the regulatory load, the final rule gives banks more time to comply, and
also reduces the numbers of contracts covered by the rule.
"We looked for opportunities to reflect common sense changes to the proposed
rule without sacrificing our goal to improve financial stability," said Fed
Governor Jerome Powell.
The Fed first proposed the rule in May 2016, and finalized it on Friday.
"Today's rulemaking is an important step towards ensuring the orderly resolution
of U.S. GSIBs and thus protecting the U.S. financial system," said Ann Battle,
assistant general counsel at trade group the International Swaps and Derivatives
Association (ISDA). The group has been working with regulators to help banks
amend their contracts in line with the rule.
"We look forward to working with all market participants to develop a solution
for compliance with the rule that both meets their needs and satisfies the
Federal Reserve Board's policy objectives."
(Reporting by Pete Schroeder; Editing by Bernadette Baum)
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