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Section 23A

October 20, 2011

From the bottom of the Bloomberg story on Tuesday which broke the news:

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

In 2009, the Fed granted Section 23A exemptions to the banking arms of Ally Financial Inc., HSBC Holdings Plc, Fifth Third Bancorp, ING Groep NV, General Electric Co., Northern Trust Corp., CIT Group Inc., Morgan Stanley and Goldman Sachs Group Inc., among others, according to letters posted on the Fed’s website.

The central bank terminated exemptions last year for retail-banking units of JPMorgan, Citigroup, Barclays Plc, Royal Bank of Scotland Plc and Deutsche Bank AG. The Fed also ended an exemption for Bank of America in March 2010 and in September of that year approved a new one.

Section 23A “is among the most important tools that U.S. bank regulators have to protect the safety and soundness of U.S. banks,” Scott Alvarez, the Fed’s general counsel, told Congress in March 2008.

From Christopher Whalen at Reuters, yesterday:

Bill Black of University of Kansas City told me that the Bank America move was not merely an administrative exercise. “Here, B of A was not the counterparty,” says Black. “The 23A issue is moving an exposure [from Merrill Lynch] that is in trouble to the insured institution, apparently at book value, from an uninsured affiliate. That should be an easy call: ‘No.’ The Fed cares about BHCs and is institutionally primed to say yes to this kind of deal, while the FDIC is institutionally primed to protect the FDIC insurance fund.”

Google indicates very few articles on this very important subject, so far.

Here’s Saule T. Omarova‘s article on Section 23A.

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2 Comments leave one →
  1. October 20, 2011 9:55 pm

    But … but … Elizabeth Warren is a socialist!!

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