European banks turned to Fed at height of crisis

WASHINGTON Fri Apr 1, 2011 1:28am BST

The Federal Reserve building is seen with the Washington Monument and U.S. Capitol in the background in Washington November 24, 2009. REUTERS/Yuri Gripas

The Federal Reserve building is seen with the Washington Monument and U.S. Capitol in the background in Washington November 24, 2009.

Credit: Reuters/Yuri Gripas

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WASHINGTON (Reuters) - Banks from Europe drew tens of billions of dollars in emergency loans from the Federal Reserve at the height of the financial crisis in 2008, underscoring the critical role of the U.S. central bank in preventing a meltdown in the world's banking system.

Nine of the 12 largest borrowers from the Fed's discount window on the day the Fed lending peaked were foreign-owned firms, documents released on Thursday showed.

Belgian-French Dexia (DEXI.BR) and Dublin-based Depfa, both second-tier European banks, accounted for nearly half of the $111 billion (69 billion pounds) borrowed from the Fed on October 29, 2008, according to lending data the Fed released to comply with a court order.

Wachovia, now part of Wells Fargo (WFC.N), was the biggest U.S. recipient with $15 billion.

Many of the biggest U.S. banks are conspicuously absent from the ranks of top discount window borrowers. They opted instead to use other emergency lending programs that the Fed created on the fly in the middle of the crisis.

While some did borrow on occasion, it was usually for relatively small amounts. For example, Goldman Sachs borrowed at least five times, with the largest loan being for $50 million. Goldman Sachs said it was testing the Fed's lending system.

The collapse of Lehman Brothers in September 2008 sent the global economy into a tailspin and caused the financial system to seize up. The Fed's documents -- more than 25,000 pages in all -- illustrate how widely the damage spread, forcing banks around the world to seek emergency help.

In the days and weeks following Lehman's bankruptcy, the Fed also made multi-billion-dollar loans to other foreign banks through its discount window, including Austria's Erste Group (ERST.VI), Royal Bank of Scotland (RBS.L), Germany's Commerzbank (CBKG.DE) and France's Societe Generale (SOGN.PA).

For the entire period covered in the data that was released, August 8, 2007 through March 1, 2010, Dexia holds the crown for the largest amount outstanding on any given day, with $37 billion on January 2, 2009. Wachovia comes in second with $29 billion on October 7, 2008.

STIGMATIZED

The discount window is the Fed's regular facility for providing emergency cash to banks in difficulty. In normal times, it is rarely used, in part because banks fear the stigma of having sought emergency help.

The Fed had resisted releasing the names of banks that tapped the discount window on the grounds that doing so might discourage firms from seeking help in the future. The central bank released the names only after having run out of legal appeals to block publication.

The documents detail lending from the Fed's discount window for period of August 8, 2007, to March 1, 2010.

The Fed, its hand forced by a new law that rewrote U.S. financial rules, disclosed details of other emergency lending.

Some of those programs doled out far more than the traditional discount window. The Term Auction Facility, for example, lent $493 billion on March 11, 2009 -- more than four times the amount of the discount window's peak lending day.

Citigroup (C.N), Bank of America (BAC.N) and other industry giants that are eligible for discount window loans borrowed heavily from those other programs in the weeks after Lehman failed. So did foreign banks.

"As much as the government tried to change the perception of it, there was always a stigma of being at the Fed window, and that never really went away during the crisis," said Jefferson Harralson, a bank analyst with Keefe, Bruyette & Woods Inc.

Analysts said the other lending programs also accepted different types of collateral and offered longer-term loans, which may have made them more attractive to big banks.

A handful of small banks show up on the discount window borrowing list taking loans of $1,000. Chip MacDonald, a banking attorney with Jones Day in Atlanta, said those may have been merely tests to see whether processes for accessing the discount window were up to speed.

Bloomberg LP, the parent of Bloomberg News, and News Corp's Fox News Network had sought the bailout details under the federal Freedom of Information law, which requires government agencies to make certain documents public.

The lending facility is an important tool the Fed has at its disposal to ensure banks remain liquid in times of stress.

"It should be emphasized that confidentiality is not meant to protect the identities of individual banks per se, but rather to make the discount window more effective in dealing with market disturbances," New York Federal Reserve Bank economists Joao Santos and Stavros Peristiani wrote on the regional central bank's blog on March 30.

(Additional reporting by Rachelle Younglai in Washington, Kristina Cooke in New York and Joe Rauch in Charlotte, N.C.; Editing by Neil Stempleman and Leslie Adler)

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