According to Bloomberg News, the Bank of America has moved its Merrill Lynch derivatives unit to "a subsidiary flush with insured deposits." Officials at the Federal Reserve liked this move, because it gave some relief to the bank holding company. Moving bad assets off a balance sheet will do that. Officials at FDIC, however, understandably do not like the move, because such a move greatly weakens the balance sheet of the subsidiary, making it more likely to fail with the FDIC on the hook for the losses. The Bloomberg story reminds us that even three years after the financial crisis, things are not yet cleaned up.
Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.
As Guido Hulsmann notes in his article, "Free Banking and the Free Bankers," under 100 percent reserve banking,
[T]here could be crises of confidence, but there can be no crises of the payments system. This is because the monetary aggregate that is relevant for payments--the money supply in the larger sense, that is, money plus fiduciary issues--could not differ from the supply of money. Its quantity could only vary to the extent that the quantity of money varies.