Fed Takes Steps to Limit TBTF Institutions

November 6th, 2014

The Federal Reserve published the final rule implementing Section 622 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (Dodd-Frank Act) yesterday, November 5, 2014.  The rule establishing concentration limits for mergers of financial institutions in the United States (US) is one of the legislation’s key provisions to prevent the proliferation of the “too big to fail” institutions that contributed to the massive bailouts of key firms such as AIG in the wake of the 2008 financial crisis.

The rules specify that financial institutions cannot merge with other financial institutions if their combined assets are greater than 10 percent of all consolidated liabilities in the financial system.  The final rule is largely similar to the proposed rule issued in May of this year; however, the final rule specifies that a financial institution can continue to engage in “securitization activities” after it has reached the 10 percent threshold.  Covered entities include insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies as designated by the Financial Stability Oversight Council (FSOC).

In anticipation of these regulations, no financial institutions have pursued such large mergers in recent years. Notwithstanding, the finalization of these rules is notable in solidifying one of the key objectives of the Dodd-Frank Act.

 

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