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Federal Reserve finalizes rules to help unwind big banks

WASHINGTON (Reuters) – The Federal Reserve on Friday finalized a new rule that should make it easier to wind down systematically important U.S. banks by creating a safe harbor for financial contracts after a firm defaults.

The decision, unanimously approved by Fed board members, forms part of global post-crisis efforts to end ‘too big to fail’ institutions that are so large and complex they could endanger the entire financial system if they fall into bankruptcy.

The rule requires global systematically important banks (GSIBs) to amend the language in common financial contracts so they cannot be immediately canceled if the firm enters bankruptcy.

By imposing new legal protections, regulators aim to prevent a run on a GSIB’s subsidiaries that could be triggered if a large number of counterparties rush to terminate their contracts, as occurred in the case of Lehman Brothers in 2008.

The new rules would apply to eight GSIBs, including JPMorgan Chase (JPM.N), Goldman Sachs (GS.N), and Citigroup (C.N).

As GSIBs sign a huge number of such deals, typically worth hundreds of billions of dollars, a market panic to terminate them could potentially drag down other institutions.

“The financial crisis showed that when a large financial institution gets into trouble, its failure can destabilize other firms and the broader financial system,” Fed Chair Janet Yellen said in prepared remarks at an open hearing on Friday.

“This requirement will help manage the risk to the financial system when a GSIB fails.”

The rule applies to a range of products, including derivatives, securities lending deals, and short-term funding agreements, that are privately negotiated rather than processed through a central clearing house.

But in a nod to the efforts of U.S. President Donald Trump’s administration to ease the regulatory load, the final rule gives banks more time to comply, and also reduces the numbers of contracts covered by the rule.

“We looked for opportunities to reflect common sense changes to the proposed rule without sacrificing our goal to improve financial stability,” said Fed Governor Jerome Powell.

The Fed first proposed the rule in May 2016, and finalized it on Friday.

“Today’s rulemaking is an important step towards ensuring the orderly resolution of U.S. GSIBs and thus protecting the U.S. financial system,” said Ann Battle, assistant general counsel at trade group the International Swaps and Derivatives Association (ISDA). The group has been working with regulators to help banks amend their contracts in line with the rule.

“We look forward to working with all market participants to develop a solution for compliance with the rule that both meets their needs and satisfies the Federal Reserve Board’s policy objectives.”

Reporting by Pete Schroeder; Editing by Bernadette Baum

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Yellen: reforms have made finance safer

LONDON — Federal Reserve Chair Janet Yellen relayed her hope that another repeat of the financial crisis will not occur “in our lifetimes.”

Addressing an audience at the British Academy in London on Tuesday, Yellen said the banking reforms put in place in recent years have made the financial system safer, and that the world should be able to avoid the type of devastating crisis that struck the global economy in 2008.

Yellen said that the changes implemented since 2008 have made the “system much safer and much sounder,” with banking regulators doing a better job searching for risks to financial stability, especially within unregulated sectors.

While not going so far as ruling another crisis out, she did lay out her hope that the next one “hopefully, it won’t be in our lifetimes.”

One growing concern among some in the financial markets is that some asset prices, such as stocks and housing, are beginning to look a bit overpriced — in the way that they did before the financial crisis struck.

But Yellen said the system is better able to handle any shocks that might occur if investors began dumping assets out of concerns about a future financial threat — the scenario that effectively pushed the global economy off a cliff in 2008.

“I think we have a strong banking sector that’s well capitalized and has a lot of liquidity,” she said.

Yellen said the U.S. unemployment rate, which stands at a 16-year low of 4.3 percent, is “below the level that most of my colleagues believe is sustainable in the long run.”

Yellen said that most policymakers believe that as unemployment falls, it will begin pushing up wages and that will result in higher levels of inflation. The Fed has hiked its Fed funds rate by a quarter point on three occasions since December, most recently this month, to a range of 1 to 1.25 percent, partly because of this concern.

Yellen declined to comment on her relationship with President Donald Trump but noted that it has been a long tradition in the United States for the Fed to have a close working relationship with the administration in power. Yellen was responding to a question her relationship with the president, who had attacked her handling of the Fed policies as “shameful” during last year’s campaign.

She said she was continuing that tradition with current Treasury Secretary Steven Mnuchin, with the two conferring often on various issues affecting the economy and financial regulation.

“I would say that I have got a good working relationship,” Yellen said, adding that the administration has respect for the independence of the Fed.

Yellen also conceded that Britain’s upcoming exit from the European Union would likely impact the British economy.

“I believe there are very deep ties between Britain and the European Union, and there will be a desire to make sure that the economic value of that remains to the maximum extent possible,” she said. “I’m sure there will be a period here of uncertainty about how this will unfold that will affect households and business decisions as it unfolds.”

One decision that could be affected, she said, was location.

Many businesses are worried about the possibility of a “hard” Brexit, whereby Britain fails to strike a deal with the remaining 27 nations of the EU before the formal departure date of March 2019. In that case, the country would see tariffs slapped on its exports to the bloc, its biggest trading partner. Many fear that could do untold harm to the British economy. Some businesses, including some from the financial sector, are mulling the possibility of leaving Britain for the EU.

By: Pan Pylas and Martin Crutsinger
Associated Press