Tags: European | Banks | Big | Fed | Borrowers | Crisis

European Banks Were Big Fed Borrowers in '08 Crisis

Thursday, 31 Mar 2011 01:34 PM

A bevy of European banks, including second-tier players Dexia and Depfa, took out tens of billions of dollars in emergency loans from the U.S. Federal Reserve as the financial crisis exploded in 2008, documents released Thursday showed.

The Fed's lending data, included among more than 25,000 pages of documents that a court forced the U.S. central bank to release, shows that Dexia and Depfa accounted for nearly half of all borrowing on Oct. 29, 2008, the day that lending through the Fed's discount window peaked at $111 billion. Belgian-French Dexia borrowed $26.5 billion and Dublin-based Depfa, a subsidiary of German property lender Hypo Real Estate Holding, borrowed $24.6 billion.

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 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, Bank of Scotland and France's Societe Generale.

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 Aug. 8, 2007, to March 1, 2010.

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 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.

A law passed last year to overhaul U.S. financial regulation required the central bank to divulge borrowing from special emergency programs it set up to stabilize financial markets during the economic meltdown, but not the Fed's regular discount window.

The new law does, however, require the release of future discount window borrowing details, but with a two-year lag.

A December data release revealed that major banks had been big beneficiaries from some of the special emergency programs the Fed set up during the 2007-2009 crisis. The combined usage of those emergency lending facilities peaked at $600 billion on Nov. 5, 2008.

The discount window is a facility central banks offer as part of their role as a lender of last resort, based on the idea that during a crisis, even healthy banks can have trouble accessing short-term funds.

Lehman Brothers filed for bankruptcy protection on Sept. 15, 2008, setting off the most virulent part of the financial crisis.

"If you look at the firms that came under pressure in that period ... only one ... was not at serious risk of failure,'' Fed Chairman Ben Bernanke told an official crisis inquiry panel in November 2009. "Even Goldman Sachs, we thought there was a real chance that they would go under.''

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