* Dodd-Frank limits ability to help individual firms
* Still skepticism "too big to fail" is over
By Dave Clarke
WASHINGTON (Reuters) - Extreme market volatility has
sparked comparisons to the 2008 global credit crisis, but
Washington's ability to help out weak financial firms is
The 2010 Dodd-Frank financial oversight law purposefully
limits regulators' ability to prop up firms caught in the
cross-hairs of a market crisis of confidence.
The idea, meanwhile, that Congress would approve any
special assistance is remote, with both liberals and
conservatives still holding their noses from the public stink
raised by bank bailouts during the financial crisis.
"I think it's unimaginable," said Phillip Swagel, who
served in the Treasury Department under President George W.
Markets' fear factor has been sky high recently as worries
about the global economy escalate after an embarrassing
downgrade of U.S. debt. In addition, fears remain that European
efforts to put a safety net under heavily indebted Italy and
Spain might not suffice to avert wider credit market
U.S. bank shares have fallen by almost 20 percent from an
early July peak, as measured by the KBW Bank Index. Bank
of America Corp, in particular, has taken a hit,
falling by about 31 percent over that time frame.
Bank stocks did rebound Tuesday with the KBW index
closing up 7 percent, but questions remain about the ability of
banks to deal with their mortgage exposures and what might
happen if market volatility evolves into a credit crisis.
Dodd-Frank restrains regulators from aiding individual
firms, and instead pushes the government to seize and liquidate
in an orderly fashion a large, failing financial firm.
For instance, it ends the Fed's ability to extend emergency
loans under its so-called "13(3)" powers.
It also prevents the Federal Deposit Insurance Corp from
providing "open bank" assistance directly to an individual
institution, as it did for Citigroup Inc in November
2008, to help keep it in business.
Regardless of the restrictions the law places on banking
agencies, several analysts and industry lawyers said the
creativity of regulators should not be underestimated if they
decide quick action is needed.
"I would bet that regulators would figure out what to do
and find a way to do it," said Thomas Vartanian, a bank
regulatory attorney with Dechert in Washington.
The law, for instance, does allow both the Fed and the FDIC
to create programs intended to deal with liquidity problems
that would be considered financial industry-wide.
Several analysts said it is unclear how this would work in
practice. But they said regulators might have some wiggle room
that could allow them to help one or only a few banks without
violating the law.
Despite the troubles facing bank stocks, there is little
evidence right now that any large institution is at a stage
where the need for a bailout needs to be considered, experts
"I think we're very far away from that being an issue, our
big banks are in much better shape today," Swagel said.
The issue for banks will be if worries over their health
leads to problems raising funds, analysts said.
If this were to occur, banks could fend off troubles for a
while by borrowing from the Fed through its discount window.
"If someone needs liquidity in the short run, they go to
the Fed," said Ernest Patrikis, a partner at law firm White &
Case and a former general counsel at the New York Fed. "I don't
know why in this market a bank could not get liquidity."
(Editing by Andre Grenon)
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