Federal Reserve Tries Wizardry to Cure Derivatives Problem

[eridani]

http://wallstreetonparade.com/2016/05/federal-reserve-tries-wizardry-to-cure-derivatives-problem/

The first proposal mapped out by the Fed is called the Net Stable Funding Ratio and would require the largest banking organizations “to maintain a stable funding structure in relation to the composition of their assets, derivative exposures, and commitments.” The Fed doesn’t want a bank run or a demand for derivatives collateral to drain the bank of its liquidity. (Read the details of the proposed rule here.)

The second plan would establish restrictions within derivative and repo contracts of U.S. Global Systemically Important Banks (GSIBs) and the U.S. operations of foreign GSIBs. The idea is to prevent derivative or repo counterparties from cancelling the contracts if the GSIB failed and was put into resolution under the terms of the Dodd-Frank legislation. That could trigger a disorderly resolution and contagion at other banks (otherwise known as a repeat of 2008). The details of that rule proposal are here.

One of the Fed speakers described this second plan as follows: “…this proposal would not apply to subsidiary national banks of GSIBs or to federal branches of foreign GSIBs. The Office of the Comptroller of the Currency [OCC] is expected to propose a similar set of restrictions to cover those entities…”

The “subsidiary national banks” of the GSIBs are where the vast majority of the obscene amounts of risky derivatives reside. According to the OCC, as of December 31, 2015, there were $237 trillion in notional derivatives (face amount) at the 25 largest bank holding companies with the bulk of that amount on the books of just four insured banks: JPMorgan Chase, Citibank, Goldman Sachs Bank USA and Bank of America.

Why is the Fed making a big deal of this rulemaking if the rule isn’t even touching the parts of the banks where the biggest threats exist? Was the whole exercise of holding a public meeting to pressure the OCC to adopt the same rule?

[merrily]

1. Very interesting timing on worrying about derivatives--or appearing to, anyway.

[Califonz]

2. So, how much of my IRA account

do they plan on converting into Treasury bonds?

[A HERETIC I AM]

3. Exactly as much.....

as you allow.