The Federal Reserve unveiled proposed regulations Tuesday aimed at keeping the nation’s largest banks from taking the kinds of risks that triggered the U.S. financial crisis and from tying their fate so closely to that of other firms.
The 173-page proposal includes far-reaching and detailed provisions, including how much money banks must hold to guard against losses, requirements for better risk management and how much the firms are allowed to transact with individual trading partners.
The new measures, mandated by the Dodd-Frank financial overhaul legislation enacted last year, are intended to apply to all U.S. bank holding companies with $50 billion or more in assets, as well as any non-bank firms that regulators deem to be “systemically important.”
“The recent financial crisis showed that some financial companies had grown so large, leveraged, and interconnected that their failure could pose a threat to overall financial stability,” Fed officials wrote in Tuesday’s draft. “The proposal would create an integrated set of requirements . . . to meaningfully reduce the probability of failure of systemically important companies and minimize damage to the financial system and the broader economy in the event such a company fails.”
The new rules are intended to prevent a repeat of the turmoil caused by the crisis. If adopted, the regulations over time would force banks to maintain certain capital levels, submit to ongoing government “stress tests” and conduct similar reviews on their own and limit their exposure to other large firms. In addition, as part of an effort to identify potential problems earlier than in the past, the companies would face more stringent regulations, or “remediation” requirements, if they began to demonstrate financial weaknesses.
Firms have until March 31 to offer comments on the new regulations, and they would have a year to comply with many of the finalized standards.
Banking industry groups praised the Fed for giving ample time to comment on the regulations and proposing to phase them in over time. But they warned that requiring large banks to hold more capital could impede economic growth.
“We’re concerned that the additional capital will have a negative impact on lending,” said Scott Talbott, senior vice president at the Financial Services Roundtable. “Too much capital will weigh against or reduce banks’ ability to lend.”