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, according to documents posted Friday on the Fed’s web site.
The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup’s Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.
This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed’s move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don’t have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed’s discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.
Research Credit: Oli
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