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Fed Proposes to Include Non-Bank Financial Firms in New Risk Taking Rules

December 21, 2011, 07:30 AM
Filed Under: Regulatory News

Reuters reported the Federal Reserve proposed new rules on Tuesday to restrain risk-taking by the largest U.S. banks as it tries to make the financial system more resilient against future crises.

According to the report, the proposal, required by the 2010 Dodd-Frank financial oversight law, includes new capital and liquidity rules for the largest banks that would roll out in two phases and not likely go further than international standards.

Reuters reports the Fed said both the capital and liquidity requirements would be implemented in two phases. The first phase would rely on policies already issued by the Fed, such as the capital stress test plan it released in November. That stress test plan will require U.S. banks with more than $50 billion in assets to show they can meet a Tier 1 common risk-based capital ratio of 5% during a time of economic stress.  The second phase for both capital and liquidity would be based on the Fed's implementation of the Basel III international bank regulatory agreement. That standard brings the Tier 1 common risk-based capital ratio requirement to 7%, plus a surcharge of up to 2.5% for the most complex firms.

The report also indicates the rules proposed will not only apply to the largest U.S. banks, but also to any financial firm the government identifies as being important to the functioning of financial markets and the economy.

The government has yet to decide which non-banks, such as insurance companies and hedge funds, meet this standard. When such companies are designated, the Fed said it may "tailor" the rules, which were drafted mostly with banks in mind, to better fit that particular company or industry.

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