The Bankwatch

Tracking the consumer evolution of financial services

Treatment of Derivatives on US bank balance sheets is swept under the table

SEC. 629. From the unobligated balances available in the Securities and Exchange Commission Reserve Fund established by section 991 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111– 203), $25,000,000 are rescinded

With that (on P615 of the US Omnibus Spending Bill H.R. 83) the single largest concern from the 2007 banking crisis, which was front and centre in the Dodd Frank legislation is quietly removed. Derivatives.

Banks won a measure easing restrictions on their derivative-trading activities.

The change would affect requirements under the Dodd-Frank law that banks spin off certain derivatives-trading activities into units that don’t enjoy access to the government safety net.

The practical impact is simple. $670 trillion in contingent liabilities of US and foreign operating in US banks, can remain on their balance sheet, which means:

  • any debts that arise as a result of those derivatives are part of the banks’ liabilities and in case of default would benefit from any taxpayer bailout
  • the commercial transaction that derivatives support, such as currency hedging, benefit form the lower cost of funds that on balance sheet funds attract.

The whole thing is swept under the carpet in support of last minute support to keep the US government from running out of funds again.

Written by Colin Henderson

December 13, 2014 at 20:14

Posted in Uncategorized

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