Last updated: October 1, 2008 2:54 am

Banking’s crisis of confidence deepens

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Wall Street rebounded on Tuesday in spite of a worsening crisis of confidence in the global banking system, as leaders of the US Congress moved to try to salvage the Bush administration’s $700bn (£385bn) bail-out plan.

A proposal to increase the ceiling for government insurance on bank deposits to $250,000 emerged as the best hope of swaying reluctant Republicans and Democrats who voted against the bill on Monday. The Senate agreed late Tuesday to vote on a revised bail-out measure on Wednesday night.

Meanwhile, the Securities and Exchange Commission issued guidance emphasising the flexibility companies have to depart from mark-to-market accounting in situations when markets are illiquid. The SEC move does not suspend mark-to-market rules, but goes some of the way to address criticism of the accounting regime that critics – including many conservative Republicans – say has fuelled a downward spiral in credit markets.

Democratic presidential candidate Barack Obama issued his strongest call yet for the rescue plan, while Republican John McCain also urged Congress to act. Both advocated increasing the deposit insurance ceiling.

Leaders of both parties in Congress promised legislation this week, and hoped a revised bill could be brought before the Senate as early as Wednesday night.

Hopes for an agreement helped the S&P 500 rise 5.3 per cent, recovering more than half its stunning 8.8 per cent decline suffered after Monday’s vote. The Dow Jones Industrial Average was up 4.7 per cent after a slide of 7 per cent on Monday.

Yet overnight interbank lending rates reached painfully high levels in the main currencies, with overnight dollar Libor leaping 4.3 percentage points to a seven-year high of 6.88 per cent.

Experts said an increase in the bank deposit insurance ceiling would reduce the risk of a destabilising run on uninsured bank deposits at weak banks.

It would also boost the Federal Deposit Insurance Corporation’s ability to broker rescue deals in which an acquiring bank takes on the deposits of a failed bank – ensuring that savers with deposits above $250,000 remain whole.

Separately, it emerged that the FDIC exercised a systemic risk exemption that allowed it to bypass its normal rules for the first time in its history to support the rescue take­over of Wachovia by Citigroup on Monday.

Additional reporting by Michael Mackenzie in New York

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