The Federal Reserve finalized a rule Thursday to limit the size of bets that banks can have with each other, a piece of the 2010 Dodd-Frank law that has been in the works for a long time.
Officials said the rule is meant to address one of the causes of the financial crisis, that the failure of each bank endangered many others that it owed money — a situation known as “contagion.”
Fed Chairman Jerome Powell called the rule “another step in sustaining an effective and efficient regulatory regime that keeps our financial system strong and protects our economy while imposing no more burden than is necessary to get the job done.”
The regulation would generally limit banks from having total credit exposure to a single other bank of more than 25 percent of its total capital. The rule would limit the aggregate loans, derivative bets, and other transactions the banks could have with other firms.
For the eight biggest banks, the limit would be 15 percent.
Randal Quarles, the Fed’s vice chairman for supervision, described the rule as a complement to the capital and liquidity rules that regulators have imposed on banks in the wake of the 2008 financial crisis.
The rule applies only to banks with more than $250 billion in assets, in recognition of the recently passed bipartisan legislation that set the cut-off for stricter oversight for banks at that threshold. Quarles said the Fed would examine applying similar rules to banks with $100 billion to $250 billion in assets.
All three members of the Fed’s understaffed board of governors voted for the final rule: Powell, Quarles, and Lael Brainard, an Obama appointee.
