WASHINGTON - The Federal Reserve Board on Wednesday proposed limits on interbank financial exposures, saying it was doing so reluctantly.

As expected, the proposal threatens to put restrictions on the correspondent relationships of all but the best-capitalized banks.

Adhering to Law

Congress called for the rule in the 1991 banking law in a attempt to reduce overall risk in the banking system. Fed governors expressed their reservations about the mandate on Wednesday.

"There are enormous costs involved in changing the rules of the game," said Governor Lawrence B. Lindsey. "Once again, we're substituting rules for judgment."

Governor Wayne Angell suggested that the central bank urge Congress to rescind the provision because banks adequately monitor each other's credit-worthiness.

The proposed Regulation F, now out for public comment for 60 days, would generally prohibit banks from risking more than 25% of total capital in a correspondent loan or deposit relationship with another bank.

However, the Fed built in flexibility for banks whose correspondents meet or exceed all capital requirements, and it exempted from the limits checks in the process of collection. The Fed emphasized that it views the rule as a series of "benchmarks," not hard and fast requirements.

For banks that deal with "adequately capitalized" correspondents, an exposure equivalent to 50% of capital is acceptable. Interbank credits of 30 days or more, however, would be limited to 25% of capital.

Transition Period Sought

While no benchmarks apply to dealings with "well capitalized" correspondents - those with risk-based capital greater than 10% of assets - all banks must set "prudential limits."

The rule is to take effect Dec. 19, but the Fed is proposing a two-year transition, during which greater interbank exposures would be tolerated.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.