Rezdog Economist on Fed Lending to foreign banks and bank runs.

It’s been all over the news that the Fed loaned billions out to foreign banks, with many Americans asking why.

Bloomberg has a good article on it, explaining it was essentially the Fed acting to prevent bank runs.

The phrase “bank run” brings to mind lines of people waiting outside a bank to withdraw their money – which is how banks finance their lending, borrowing short term at low interest from depositors then lending long term at higher interest, making their profit from the spread between interest rates.

Investment banks work on the same principle – borrowing short term, such as in the money markets – and lending long term. When investment banks lose their short term funding, this is also a bank run – which is what happened after Lehman Bros collapsed and the money markets froze up.

The Fed loaned billions from their discount window – generally 1% above the target rate the Fed sets for banks to loan reserves between themselves, pretty much the cheapest money in town – to banks whose short term sources had dried up, in order to prevent bank runs.

A majority of these were foreign banks, who held dollar denominated assets funded out of the money markets. The 1980 Monetary Control Act allows the Fed to lend from its discount window to any bank which has a US branch holding reserves at the Fed.

I believe many of these loans were swap lines, with foreign banks swapping euros for dollars at the given exchange rate, later repaying the loans with interest. This is can occur when there is a liquidity problem-assets exist but are tied up and can’t be sold without taking a loss.

Per the Fed, all of these loans have been paid back at interest. After expenses all of the money earned by the Fed is paid into the US Treasury.

I’m not saying right or wrong, merely adding my two cents into any conversation on the topic.

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About osori

Too old to know better.
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7 Responses to Rezdog Economist on Fed Lending to foreign banks and bank runs.

  1. Gwendolyn H. Barry says:

    I’m just a small *actual small mom & pop style* handmade business. I’ve had 30day with some of my suppliers for over 10 years. And! that was after a five or seven year established buying relationship. Well, as of the beginning of 09 none of my suppliers would give me 30 day. Nothing to do with me, it was a banking decision because the banks revoked lines of credit etc. Since 09 I’ve seen folks go the way of the mastadon because of this. We ARE HURTING AND BARELY HOLDING ON. It’s not business sense that keeps me “making”… it’s my love and devotion. *and SANITY* If you do what you love, you are blessed, right? Your ‘econ-files’ help me to understand the underpinning reasons for my “lack” in business, often, Oso. And per this story, I think your point being that monies have been moved strategically around to support banks / not businesses… certainly not little small businesses. We are being squashed beneath the “up front” needs of paying cash on the line. The truth is, if so many of my customers had not suffered the same kind of set back, we would abandon each other for needs of the 30 day business process which underpins operating costs that keep you current. I am fortunate that many of my customers are aware and willing to wait for a seven business day turn around. The banks are holding money. They are finding ways to screw customers (business and pvt) out of more money for “services” almost monthly. IT’S OUTRAGEOUS.

  2. osori says:

    Exactly. They are sitting on bundles of cash, using it to buy back stocks or make sometimes risky investments – because the Dodd/Frank NON-financial reform bill reinforced Too Big To Fail. They know they’ll continue to be bailed out. Also they are not being made to write down their losses.

  3. Krell says:

    The Too Big to Fails have skewed the economy so that it no longer functions. Too many dollars are going to speculation and hedging and not enough towards producing goods of any sort.

    There is something inherently wrong when a speculator makes more money in profit than the person that actually makes the item. Happens all the time.

    Ever notice when there is a world crisis, the price of gasoline instantly shoots up, even when it’s gasoline that’s already made. That oil in the ground has nothing to do with the gasoline that is ALREADY at the gas station waiting to be sold. Speculation.

    Your economic posts are always informative, Oso. You have a way of making international finance and banking seem like even I can understand it.

  4. John Myste says:

    Mr. Oso, two thoughts spring to mind:

    1. That was not just your two cents, as you alleged. It was at least a nickel.

    2. I saw you had posted something, and I was delighted. Then I found out it was about banks. I was already here, so I read it anyway :).

  5. jackjodell53 says:

    Oso and Gwen,
    You’re right. It IS outrageous, and no thought whatsoever is given to the small business owner, the REAL backbone of America!

  6. scaredstiff says:

    There is no one watching the store so to speak. We’ve not learned anything except if you get big enough, you can get away with anything. Warren’s hands are tied. Obama is one of them, wall street. Ever wonder why the right doesn’t go after Geithner.

  7. bra lån says:

    They say in the business report in Bloomberg News that the recent poor jobs report has sent down the rates. What is your idea on this? Will a weak economy be good news for the cost of credits?

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