Justices to hear case challenging Fed's authority


WASHINGTON -- The Supreme Court agreed yesterday to consider the Federal Reserve Board's plea to revive its power to order bank holding companies to transfer some of their own money to troubled banks they own.

A federal appeals court ruled last May that the Fed had no authority, under federal banking law, to adopt its so-called "source of strength" rule against bank holding companies it regulates.

That rule, applied by the Fed since 1966 and codified since 1984, is designed to make sure that those companies' banking subsidiaries can turn to their parents in times of financial stress and get money to strengthen their capital reserves.

Ordinarily, the Fed said, it is able to enforce its "source of strength" policy by negotiations.

But, it added, it must be able to back up those negotiations with a threat of formal enforcement. The appeals court ruling takes that power away from it, the Fed said.

The Fed's use of its rule was challenged by MCorp, a Texas bank holding company, now in bankruptcy. MCorp was ordered by the Fed in 1988 to take steps to shore up its 25 bank subsidiaries' reserves.

After regulators put 20 of its banks in federal receivership, MCorp and its five remaining banks filed for reorganization under bankruptcy. The Fed then moved in with new charges that MCorp was failing to act as a source of strength to those banks.

MCorp argued that the Fed had no authority to interfere with the bankruptcy proceedings, and a federal judge agreed. The 5th U.S. Circuit Court of Appeals, however, ruled that the Fed sometimes may take steps against a bank holding company in bankruptcy -- but not if the action is beyond the Fed's powers.

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