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Fed Proposes Rule Limiting Financial Firms’ Consolidation

The Federal Reserve is seeking input on a measure that would bar U.S. banks from acquisitions that push their share of all financial-company liabilities above a 10 percent threshold.

The Fed proposal released today would implement a Dodd-Frank Act mandate that would match a nationwide 10 percent cap that already applies to deposits. The central bank is inviting public comments until July 8.

The limit was meant to promote financial stability and combat perceptions that some U.S. institutions may be too big to fail. The Financial Stability Oversight Council said in a 2011 report that the provision will reduce the risks “created by increased concentration arising from mergers, consolidations or acquisitions.”

The measure would bolster an existing industry cap prohibiting mergers that create a bank with more than 10 percent of U.S. deposits, “because it also takes into account non-deposit liabilities and off-balance sheet exposures,” according to the oversight council’s report. It listed companies including Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. as having sufficient liabilities to face restrictions on acquisitions.

The financial sector’s current liabilities stand at about $18 trillion, according to the Fed, meaning a $1.8 trillion maximum for any potential combination of firms.

Systemic Risk

“It would be a mistake to read this proposal as suggesting the doors are open to combinations that produce banks with up to $1.8 trillion of liabilities,” Jaret Seiberg, an analyst at Guggenheim Partners LLC, wrote in a note to clients today. “Other parts of Dodd-Frank bar regulators from approving deals that raise systemic risk.”

The Fed’s proposal, which would need a final approval after the comment period, calls for industry liabilities to be calculated as a two-year average of aggregate consolidated liabilities. The liabilities of a financial firm would be the difference between its risk-weighted assets and total regulatory capital.

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