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.