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Fed’s Barr calls for banks to be more proactive on hedge fund and other counterparty risks

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Michael Barr, the US Federal Reserve’s Vice Chair for Supervision, has warned that Wall Street lenders must do more to identify risks posed by firms they do business with as the central bank looks to increase oversight of risk from hedge funds and other counterparties, according to a report by Bloomberg.

Speaking at the New York Fed’s conference on counterparty credit risk management on Tuesday, Barr advocated increased credit risk assessment of trading partners and their leverage, citing the $10bn of reported losses incurred by several lenders in the wake of the collapse of hedge fund Archegos Capital Management as an example of what can happen when lenders fail to have a full understanding of their exposures.

In addition, Barr said that Federal Reserve supervisory tools including annual stress tests are key to assessing the threat posed by counterparty risk to the banking system.

US regulators have been discussing ways to improve the consistency in data banks gather from counterparties like hedge funds, according to Bloomberg, with some officials backing increased examination of potential risks arising from the relationships between hedge funds and their prime brokers by the Financial Stability Oversight Council.

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