Late yesterday, the Federal Reserve proposed rules requiring the nation’s largest banks to hold more capital and to keep it more easily accessible. This is one effort on their part to prevent another financial crisis. Tough specific details are still forthcoming, the requirements are seen as less strict than those put forth for international banks — allowing American banks to breathe a sigh of relief.
In a 173-page proposal that tied to the Dodd-Frank regulatory law passed last year, the Fed also proposed the first formal limits on the amount of credit exposure that a bank holding company can have to any major borrower be it another bank or corporation.
The goal is to prevent one bank from being susceptible to failure because of a relationship with another large institution. The lack of a cash cushion in the 2008 financial crisis caused many firms to try to rapidly unwind transactions that had troubled institutions on the other side of them, worsening a partner’s troubles and accelerating the market’s crash.
One of the more important parts of the 173-page proposal is a provision that requires large banks to have a “stand-alone risk committee of the board” that works alongside the chief risk officer to handle company-wide risk management — a big step for in the right direction for the discipline.