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Inside Washington (05/11/2010)
* WASHINGTON (5/12/10)--The Federal Reserve could begin testing a program as early as June to extract excess cash from the financial system, the central bank said Monday. The announcement signals that Europe’s debt problems are not preventing the Fed from unwinding a stimulus plan, said American Banker (May 11). The Fed has authorized up to five small offerings of term deposits. The term deposit facility could provide an extra incentive for banks to keep their money at the Fed instead of lending it out--which could help control inflation, the publication said. The Fed had flooded the system with cash by purchasing assets, leading banks to shore up $1.1 trillion in extra reserves. The Fed holds those funds in overnight accounts. Now that the economy is on a more solid foundation, the Fed is looking to remove its emergency support to tighten credit. In a statement, the Fed said the offerings are part of “prudent planning” and do not have any implications for “near-term conduct” of monetary policy ... * WASHINGTON (5/12/10)--The Federal Reserve has decided to reopen swap lines with the European Central Bank and banks in Canada, the United Kingdom, Japan and Switzerland. The decision places the central bank in a “delicate political position,” said American Banker (May 11). Fed officials dispute that they re-opened the lines so they could bail out foreign banks. Instead, they said they want to improve liquidity conditions in the U.S. dollar funding markets and to prevent troubles in Europe from spreading. In the swap lines, the Fed lends to foreign central banks, which then use the money to make U.S. dollar loans to financial institutions in their home markets ... * WASHINGTON (5/12/10)--Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) Monday released language to strengthen the Volcker Rule--named after former Federal Reserve president Paul Volcker--which would ban proprietary trading by banks and also crack down on investments in private equity ventures and hedge funds (American Banker May 11). The amendment would allow banks to continue proprietary trading for buying and selling activities that do not result in a conflict of interest. Under the amendment, banks also could provide advisory services to hedge funds as long as they do not create taxpayer bailout risk. Regulators must adopt rules that impose higher capital standards on systemically significant companies and nonbanks ...


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