Release of discount window data reveals big European bank bailout

discount window lending

The long-awaited release of discount window data by the Federal Reserve illustrates the global impact of Wall Street bank failures. Image: CC laura padgett/Flickr

To prevent going belly-up during the financial crisis, anonymous banks lined up at the Federal Reserve’s discount window for cheap loans. Last week the Supreme Court ruled in favor of a Freedom of Information Act request that the Fed had to reveal which banks borrowed from the discount window and how much was loaned. Data unveiled by the Fed Thursday shed light on how Wall Street’s meltdown spread damage around the globe.

Fed bails out the world’s banks

The discount window was created by the Fed a century ago to help healthy banks caught in a cash crunch with short-term loans. Due to the stigma in financial circles associated having to stand before the Fed with hat in hand, the identities of the borrowers have always been kept secret. But the Fed was forced to make the data public by the Supreme Court after it ruled in favor of a Freedom of Information Act request filed by Bloomberg and Fox Business. When the Fed finally released the data Thursday, any concern about a negative stigma may have been alleviated by the fact that just about every bank in the world had to stand in line at the discount window as the global financial system teetered on the brink of collapse. More than 25,000 pages of documents show the Fed lent as much as $110 billion through the discount window in one day as the financial crisis peaked.

Surprise! European banks were biggest borrowers

Wall Street banks have taken most of the flak for government bailouts during the financial crisis. But data released by the Fed revealed that European banks were among the biggest borrowers at the discount window. On Oct. 29, 2008, Belgian-French bank Dexia borrowed $26.5 billion and Dublin-based bank Depfa, owned by German mortgage lender Hypo Real Estate, borrowed $24.6 billion. The discount window also made multi-billion-dollar loans to other European banks including Austria’s Erste Group, Bank of Scotland and France’s Societe Generale. On this side of the pond, before it became the biggest bank failure in history, Washington Mutual borrowed $2 billion on Thursday, Sept. 18, 2008, to get through the weekend. When that loan was due Monday, Wamu took a $2 billion overnight loan and kept taking another $2 billion every night until it was taken over by J.P. Morgan Chase on Thursday, Sept. 25, 2008.

Data shows global extent of financial crisis

When the collapse of Lehman Brothers in September 2008 triggered the financial crisis, the global economy went into a tailspin, the financial system froze and banks around the world begged the Fed for help. The release of the discount window data shows just how bad the damage was and how quickly it spread. During testimony to a congressional panel investigating the financial crisis in November 2009, Fed chairman Ben Bernanke said of all the banks lined up at the discount window, only one was not at risk of total collapse. The Dodd-Frank financial reform bill passed in 2010 removes confidentiality from discount window lending, but not until two years have passed from the time the loans are made — about the same period it took the courts to force the Fed to do it this time.


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