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Take the Money and Run: Citi's Big Week

John Grgurich
July 12, 2013

Two hours before the final bell on the final day of trading, Citigroup (NYSE: C) is up 4.7% for the week on reassuring news from the Fed, and despite unsettling news from regulators.

New rules discussed, and old news revisited
On Wednesday the Federal Reserve released the minutes from its June Federal Open Market Committee meeting, when chairman Ben Bernanke laid out a plan for the tapering of quantitative easing. The minutes show that the central bank is not as eager to begin tapering as it first appeared, which has reassured nervous markets.

And on Tuesday the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation announced proposed new capital requirements and leverage ratios for the nation's banks.

Leverage ratios would increase to 5% for the country's eight biggest bank-holding companies; global regulators now ask for 3%. And all banks would be required to hold twice the amount of capital they now do, as a cushion against runs, soured assets, and all the other things that can go wrong for a bank in times of financial crisis.

Foolish bottom line
Whether you're invested in Citi or any other American bank, the proposed new rules should make you stop and think.

When banks have to hold more capital, they have less to lend out, and are therefore less likely to make money, all other things being equal. The same goes for leverage. Higher leverage allows banks to do more with the money they have. But high leverage and low capital cushions were some of the very things that caused the financial crisis. So what do you want: safe ban