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: Fed report flags banking vulnerabilities revealed by massive $10 billion default by Archegos Capital

The U.S. Federal Reserve Board said Wednesday it found weak practices in banks with exposure to the $10 billion default of Archegos Capital Management earlier this year.

“The event has so far revealed weaknesses in margin practices and counterparty risk management at some firms,” the Fed said in its semi-annual Supervision and Regulatory Report.

The Fed, which did not name the banks directly involved, said it would provide feedback to financial firms on areas of “weak” practices that could cause vulnerability in the financial system.

“The assessment also highlights the importance of continued global coordination in the supervision of cross-jurisdictional activities,” the Fed said.

The problems with Archegos Capital, which is the family office trading firm of Bill Hwang, surfaced earlier this year with massive losses at a few big banks. The firm could not meet margin calls related to total return swap agreements and other positions financed by prime brokers.

Providing a glimpse of its regulatory activities of major banks such as JPMorgan Chase & Co.
JPM,
-0.76%
,
Wells Fargo & Co.
WFC,
+0.12%
,
Goldman Sachs Group Inc.
GS,
-1.59%

and Bank of America
BAC,
+0.45%
,
the Fed said it would focus on trading and counterparty risk management, including areas such as concentrations, hedging and client leverage.

It’ll also keep an eye on risks tied to the interest rate environment and the expiration of stimulus programs launched to fight the economic downturn caused by the COVID-19 pandemic.

It’s also formulating internal liquidity stress testing scenarios and methodologies, as well as independent risk management, nonbank liquidity risk and collateral management.

“Large financial institutions have remained well capitalized and able to support lending through the COVID event,” the Fed report said. “Recent stress test results show large financial institutions have sufficient capital levels to continue lending to households and businesses during a severe recession.”

Cyber security remains a “critical component” of the resilience of banks and remains the top risk identified at major financial institutions, the Fed said.

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