Domino spacing

17 April 2012 By Daniel Indiviglio

Many were in danger of toppling after Bear and Lehman fell. Limiting their exposure to a single counterparty, as Dodd-Frank does, should help prevent another similar chain reaction. Big banks may not like it but this too-interconnected-to-fail measure is worth implementing.

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New single-party concentration limits to be imposed by the U.S. Federal Reserve may force banks to cut credit by as much as $1.2 trillion, according to a study to be released on April 30 by The Clearing House, a trade association owned by big commercial banks.

The Dodd-Frank Act requires that large financial institutions limit their exposure to single counterparties to 25 percent of their regulatory capital. The Fed intends to take these rules a step further by capping at 10 percent the exposure banks with assets of more than $500 billion can have to one another. The limits are due to go into effect in July 2013.

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