Fed Waives Limits on Citi, B of A Affiliate Dealings

WASHINGTON — Feeding its campaign to foster liquidity, the Federal Reserve Board last week permitted two large banks to conduct otherwise off-limits transactions with affiliates.

Rules designed to prevent holding company affiliates from endangering banks prevent certain transactions, including lending more than 10% of the bank's capital to any one affiliate or more than 20% to multiple units.

In separate but similar Aug. 20 letters to Citigroup Inc. and Bank of America Corp., the Fed allowed their banking units to each lend $25 billion to securities affiliates, which in turn used the funds to meet client liquidity needs. The Fed required the broker-dealers to overcollateralize the loans, and required the holding companies to guarantee them.

Industry insiders said the money is simply flowing from the banks through the broker-dealers to clients. Each company houses the infrastructure for these client transactions in their broker-dealers, including the people and systems to price and monitor collateral.

The central bank said the waiver of its 23-A rules would end when it reverts to normal discount window operations. On Aug. 17 the Fed lowered the cost and eased the terms of discount window loans to provide markets with more liquidity. Both Citi and BofA said they borrowed $500 million from the window.