The Federal Reserve on Tuesday put forward a rule aimed at preventing “asset fire sales” like the one that preceded the global financial collapse of 2008.
Firms that deal with the largest banks would be forbidden from canceling deals with them in the event of their bankruptcy, under the draft approved by the Fed’s Board of Governors. The hold on transactions would last for 48 hours.
“The proposed rules we are considering today are important elements of the Board’s strategy to ensure our financial system remains strong and stable enough to support the economy through both good times and bad,” Fed Chair Janet Yellen said.
The Fed also proposed regulations that would tie the largest banks’ minimum funding levels to their risk profile, in a bid to minimize systemic “overreliance on unstable funding sources.”
The worldwide financial crisis of 2008 was sparked after the investment bank Lehman Bros. went bankrupt. The firm’s failure prompted panicked contract cancellations that sent shockwaves throughout the market.
The rule is expected to be fought by lobbyists from major asset management and insurance firms. According to Bloomberg, industry groups that represent some of the largest institutional investors, including BlackRock and MetLife, vigorously oppose the rule. They are “arguing that it abuses investors’ rights and could make things worse,” the news service noted, by actually encouraging fire sales “at the first whiff of trouble, even before a failure.”
The largest banks, however, have already included emergency restrictions on transactions in many of their contracts. They agreed to the change in 2014, after an effort by regulators from G-20 countries
