Reuters: Regulatory News: Japan seeks relief from Fed proposal

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Japan seeks relief from Fed proposal May 3rd 2012, 22:15 Thu May 3, 2012 6:15pm EDT * Japan says Fed proposal could hinder monetary policy * Bank of Japan says issues can be solved through discussions * Complaint is similar to those aired against Volcker rule By Dave Clarke WASHINGTON, May 3 (Reuters) - Japan's central bank is warning the Federal Reserve that a proposal intended to make the largest U.S. banks less risky could unintentionally cause problems in foreign debt markets and hurt Japan's ability to carry out its monetary policy. The Fed has proposed limiting the credit exposure a large bank can have to a single counterparty in an effort to make sure the largest U.S. financial services firms can not be sunk by problems at one institution with which they do business. [ID: nL2E8FR9ZL] The Bank of Japan said in a letter to the Fed that the proposal is problematic because it could cause large U.S. banks that play a key role in how Japan manages its money supply to limit their exposure to foreign central banks. The letter, dated April 28, was posted on the Fed's website on Thursday. Japan's central bank also warned the proposal could lead to problems in its government debt markets if large U.S. banks have to limit their exposure there as well. U.S. government debt securities are exempted from the proposed limit. Bank of Japan Executive Director Kenzo Yamamoto wrote in his two-page letter that he believes the Fed "through constructive international dialogue, will find a creative and practical solution." Mexico's central bank has also raised concerns about the proposal. The complaints from abroad are similar to ones aired earlier this year by foreign governments against a U.S. proposal, known as the Volcker rule, to greatly restrict banks' ability to trade for their own profit. Former Fed Chairman Paul Volcker championed the policy. Because the Volcker rule excludes trades in U.S. Treasuries but not debt issued by other countries, foreign governments have complained to U.S. regulators that it will make their debt markets less liquid and raise their funding costs. The credit limit proposal was part of a broader set of proposed regulations issued by the Fed in December that the U.S. central bank collected feedback on through April 30. A final rule on these proposals is not expected for months. Link this Share this Digg this Email Reprints

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