Fed emergency loans saved many banks during financial crisis
WASHINGTON — The Federal Reserve’s huge lending programs, which saved Wall Street in fall 2008, also benefited a wide range of other financial companies, including community banks, credit unions, and foreign banks, according to documents released Thursday by the Fed.
Hundreds of small banks borrowed modest amounts of cash in 2008 and 2009, ranging from $1,000 to several million dollars, from an emergency loan program known as the discount window.
And the Fed helped save some of the largest banks in Europe by pumping desperately needed dollars into their U.S. subsidiaries. In fact, the biggest borrower from the Fed program was Dexia, a French-Belgian bank that frequently held more than $30 billion in outstanding loans from the program from late 2008 to early 2009.
The long list of borrowers, provided in the form of a daily loan register, gives a striking impression of a crisis spreading to every last corner of the financial system.
Some banks borrowed minimal amounts to test the process in case things got worse. For example, First City Bank in Fort Walton Beach, Fla., borrowed just $1,000 in October 2008 and repaid the money the next day.
Other banks were already struggling to survive. Pacific National Bank of San Francisco borrowed 125 times from February 2008 to February 2009. The bank was closed by regulators in October 2009.
Perhaps the most surprising revelation in Thursday’s documents was that foreign banks quickly became the largest and most frequent borrowers. By late September 2008 banks from Spain, France, and Japan had borrowed billions. An analysis of discount window lending from February 2008 to February 2009 shows that the vast majority of the loan volume went to foreign institutions.
Donald L. Kohn, the Fed’s vice chairman during the crisis, said many foreign banks needed dollars to meet their financial obligations.
“They not only borrowed dollars from their central banks, but they needed to borrow dollars from us as well,” said Kohn, now a fellow at the Brookings Institution.
“It is incomprehensible to me that while credit-worthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit,” Sen. Bernie Sanders, I-Vt., wrote in a letter sent Thursday to the Fed chairman, Ben S. Bernanke PhD ’79, and other government officials.