From the Regulators

Federal Reserve proposes two rules

By James Langton |

The U.S. Federal Reserve Board proposed a new rule on Tuesday designed to curb systemic risk by improving the stability and resolvability of large, complex financial firms.

The proposed rule would require U.S. global systemically important banking institutions (GSIBs) and the U.S. operations of foreign GSIBs to amend the contracts used in financial transactions (such as derivatives, securities lending, and short-term funding transactions) to prevent those contracts from being immediately cancelled if the firm enters bankruptcy or resolution.

The Fed is concerned that the mass termination of these sorts of contracts could lead to a disorderly unwinding of the firm, spark asset fire sales, and transmit financial risk across the U.S. financial system. The proposed rule is intended to "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 Fed says in a statement announcing the proposed rule.

Separately, the Fed, along with the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) on Tuesday proposed a rule designed to "strengthen the resilience" of large banks by requiring them to maintain a minimum level of stable funding.

The introduction of the so-called "net stable funding ratio" (NSFR) is part of the reforms that make up the new Basel III regime for global banks. "The proposal is designed to reduce the likelihood that disruptions to a banking organization's sources of funding will compromise its liquidity position," the regulators say, adding that this will also bolster overall financial stability.

The NSFR is scheduled to take effect on Jan. 1, 2018.

Both proposals are out for comment until August 5.