TWO EUROPEAN banks used almost half of the US Federal Reserve’s emergency lending as the financial crisis peaked at the end of October 2008.
Dexia of Belgium borrowed $26.5 billion and Depfa of Germany used $24.6 billion in overnight funds from the Fed’s discount window on October 29th, 2008, according to documents released by the US central bank.
The revelations came in a swath of records released by the Fed yesterday after it lost an appeal to the Supreme Court and was forced to respond to a Freedom of Information Act request by Bloomberg and Fox News.
Printed out, the stack of documents released by the Fed is about 6ft high. The Fed resisted releasing data on discount window borrowers because it argued that doing so would create a stigma that would put banks off using emergency credit in the future.
The numbers show that the two European banks were in an even more precarious position than previously thought in the autumn of 2008, reliant on US central bank funding that could be turned off overnight.
The discount window is the last refuge for banks unable to borrow elsewhere. Central banks use it to lend at a penalty rate to banks with liquidity problems, taking some of their good assets as collateral.
Use of the Fed’s discount window peaked at $110 billion at the end of October 2008 as the financial crisis reached its worst point after Lehman Brothers collapsed in September. Almost 74 per cent of that lending went to the New York branches of foreign banks.
The revelation that foreign banks were such big users of the discount window, as well as the Fed’s other crisis-lending programmes, is likely to anger members of Congress who think the Fed overstepped its authority.
Other big users of the discount window on that day were Wachovia, which borrowed $15 billion, Bank of Scotland, which took $11 billion, and Norinchukin of Japan, which borrowed $6 billion.
These funds are in addition to money that banks borrowed from other Fed programmes that were similar to the discount window, such as the term auction facility.
“In October 2008, Dexia was one of the banks most dependent on the central banks and especially the European Central Bank,” the Belgian bank said last night. “Liquidity was stretched very thin at that period and it was particularly difficult for non-US banks to get financing in dollars.”
Depfa declined to comment, however a person familiar with the German bank’s situation said it was overly reliant on short-term funding in 2008.
When Lehman went bankrupt, it could only secure funds through central banks such as the Fed. – Copyright The Financial Times Limited 2011
