The Federal Reserve on Friday finalized a new rule that should make it easier to wind down systematically important U.S. banks by creating a safe harbor for financial contracts after a firm defaults.
The decision, unanimously approved by Fed board members, forms part of global post-crisis efforts to end ‘too big to fail’ institutions that are so large and complex they could endanger the entire financial system if they fall into bankruptcy.
The rule requires global systematically important banks (GSIBs) to amend the language in common financial contracts so they cannot be immediately canceled if the firm enters bankruptcy.
By imposing new legal protections, regulators aim to prevent a run on a GSIB’s subsidiaries that could be triggered if a large number of counterparties rush to terminate their contracts, as occurred in the case of Lehman Brothers in 2008.
The new rules would apply to eight GSIBs, including JPMorgan Chase,