The 173-page proposal from the Federal Reserve issued this week contained some surprises.

Chiefly, the Fed has proposed new limits that could restrict business between big institutions. The net credit exposure between two systemically significant banks would be capped at 10 percent of a company's capital. Firms that carry less systemic significance would be capped at 25 percent. The new proposal aims to limit bank interactions that could threaten the entire system, avoiding a repeat of the domino effect of 2008.

The Fed also set some standards aimed at increasing board accountability and forcing banks to embrace better risk management programs. The proposal calls for bank boards to regularly review capital adequacy reports, approve various changes to internal liquidity metrics, set standards on appropriate level of liquidity risk and the like. These proposals reflect the view that boards perhaps were not effective overseers as the financial crisis set in. They have certainly been criticized as effete.

Some boards are doing more in this area already, as risk management has stepped up as a priority. But the proposals serve notice that this is exactly what directors are supposed to be doing, and they ratchets up the legal liability should a bank suffer liquidity woes. At the same time, the Fed has decided to defer action on specific capital level and ratio requirements, deferring to the Basel III group. It would be surprising if the Fed were to dramatically depart from Basel III. We certainly expect surcharges on the biggest banks.

For more:
- here's an article from the Financial Times
- here's a Bloomberg article

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