Fed proposes rules to boost stability of financial system

WASHINGTON – The Federal Reserve has put forward new rules aimed at addressing one of the primary causes of the 2008 financial crisis — the financial exposures that the biggest banks had with each other.

The Fed is proposing new limits on that exposure. It hopes the new rules will prevent the type of crisis that engulfed the U.S. financial system in September 2008 when the collapse of Lehman Brothers raised fears about the stability of other banks that had made loans to Lehman.

The central bank on Friday approved by unanimous vote putting the new rules out for a 90-day comment period.

Fed Chair Janet Yellen said that the financial crisis had shown that the lending that had taken place among the country’s biggest banks had not eliminated risks but instead had magnified them.

“We are determined to do as much as we can to reduce or eliminate the threat that trouble at one big bank will bring down other big banks,” Yellen said.

The rules would implement a portion of the Dodd-Frank Act passed by Congress in 2010 in response to the 2008 crisis, the worst financial crisis to hit the country in seven decades.

The rules would apply only to the nation’s biggest bank holding companies with assets of $50 billion or more. Banks with assets between $50 billion and $250 billion would be subject to only the minimum requirements established by Dodd-Frank. That requirement is a limit of loans to another financial firm of 25 per cent of the bank’s total capital.

Banks with assets above $250 billion would face a stricter limit of 25 per cent of the bank’s safest capital, known as Tier 1 capital.

Fed Gov. Daniel Tarullo said that while the reforms already implemented have reduced the interconnections between the largest financial firms by roughly half from pre-crisis days, it is still important to “put safeguards in place to help prevent a return to those prior practices.”