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April 16, 2014

Biggest Banks Face Tougher Basel Rule on Risk Concentration

“Banks identified as systemically important to the global economy face tighter rules on how much business they can do with each other as part of a push to limit the chance a single failure would drag down multiple lenders.”

“The Basel Committee on Banking Supervision published rules that from 2019 will cap one too-big-to-fail bank’s financial dealings with another at an amount no greater than 15 percent of its capital. The measures also refine an existing rule capping the amount of business that a bank can do with a single counterparty at no more than 25 percent of its capital.”

“Such limits “can directly contribute toward the reduction of system-wide contagion risk,” the Basel group said in a statement on its website. The tougher rules are needed to protect banks from “traumatic losses caused by the sudden default of an individual counterparty or group of connected counterparties.”

“The Basel group’s overhaul of its so-called large-exposure rules are part of regulatory measures to address the risks posed by the largest banks. The Financial Stability Board has drawn up a list of 29 lenders including HSBC Holdings Plc (HSBA), JPMorgan Chase and Co. and Barclays Plc (BARC) that face higher capital requirements because of the risk their failure poses to the global economy.”

“Bank of England Governor Mark Carney, who chairs the FSB, said this month that “further intense work” is needed on rules for too-big-to-fail banks.”

“The Basel rule covers loans, some derivatives trades and securities-financing transactions. Exemptions to the measure will apply for intraday-interbank lending, and banks’ purchases of sovereign bonds.”


Read full Bloomberg article here.

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