Crooks and Liars » Federal Reserve Bends the Rules for Citibank and Bank of America

Crooks and Liars » Federal Reserve Bends the Rules for Citibank and Bank of America:

"In a clear sign that the credit crunch is still affecting the nation’s
largest financial institutions, the Federal Reserve agreed this week to bend key
banking regulations to help out Citigroup and Bank of America. The regulations
in question effectively limit a bank’s funding exposure to an affiliate to 10%
of the bank’s capital. But the Fed has allowed Citibank and Bank of America to
blow through that level. Citigroup and Bank of America are able to lend up to
$25 billion apiece under this exemption, according to the Fed. If Citibank used
the full amount, “that represents about 30% of Citibank’s total regulatory
capital, which is no small exemption,” says Charlie Peabody, banks analyst at
Portales Partners. So, how serious is this rule-bending? Very. One of the
central tenets of banking regulation is that banks with federally insured
deposits should never be over-exposed to brokerage subsidiaries; indeed, for
decades financial institutions were legally required to keep the two units
completely separate. This move by the Fed eats away at the principle."

It doesn't seem that pouring more cash into the market is going to solve the problem here. This further sounds like it is setting up for an even worse crisis, where defaulted loans could destabilize the banking industry.