Open Board Meeting May 3, 2016

TL;DR

Proposals to enhance stability with Net Stable Funding Ratio and QFC restrictions.

Transcript

CHAIR YELLEN. Good afternoon and welcome to our guests who are attending or watching our meeting. The proposed rules we are considering today are important elements of the Board's strategy to ensure that our financial system remains strong and stable enough to support the economy through both good times and bad. The first proposal we will consider ... Read More

Key Insights

• 🏦 NSFR strengthens large banks' resiliency by ensuring stable funding profiles tailored to risk.
• 🛄 QFC restrictions aim to prevent system risks during GSIB failures and facilitate orderly resolutions.
• 🤩 Balance between GSIB resolvability and counterparty flexibility is a key consideration in the proposals.
• 🪡 Need for market transparency and protection against QFC-related systemic risks drives rule development.
• ❓ Transition provision addresses existing QFC duration while promoting GSIB resolvability progress.
• ❓ Proposal benefits include reduced financial crisis impacts and enhanced stability through QFC regulation.
• 📏 GSIB focus reflects systemic importance requiring stringent rules for financial stability maintenance.

Questions & Answers

Q: What is the objective of the proposed Net Stable Funding Ratio (NSFR)?

The NSFR aims to enhance large banking organizations' resiliency by establishing stable funding profiles based on one-year time horizons to prevent liquidity risk and strengthen the financial system.

Q: How will the QFC restrictions benefit financial stability during a GSIB's failure?

QFC restrictions prevent counterparties from exercising default rights upon another entity's failure within a GSIB group, facilitating an orderly resolution to avoid market destabilization caused by mass unwinding of QFCs.

Q: Why were only GSIBs targeted with these proposals?

The focus on GSIBs is due to their significant interconnectedness and large QFC portfolios, making them high-risk entities where ensuring orderly resolution is crucial for financial stability.

Q: What considerations led to the transition provision for existing QFCs in the proposal?

The transition provision allows existing QFCs to remain unchanged but requires new QFCs to comply with the rules, balancing the need for orderly resolution progress with counterparties' flexibility and potential migration to non-GSIBs.

Summary & Key Takeaways

• Proposed rules aim to strengthen large banking organizations' resiliency through the Net Stable Funding Ratio (NSFR) to prevent failures.

• Implementation of NSFR tailored to firms' risk profiles to enhance financial system resilience to market stress.

• Restrictions on Qualified Financial Contracts (QFCs) to facilitate orderly resolution of failed GSIBs and prevent systemic risks.