The loan by the so-called discount window turns a little used program for banks, which some long-term financing for troubled institutions, of which one the fed for more than a year regularly borrowed to cash low run.
The Central Bank has a low risk loans even to make the protection of the demanding large amounts of collateral. But propping keeping banks afloat, so that they even deeper get fight in debt cleanup costs for the Federal Deposit Insurance Corporation, as it can increase up to banks. It can also clog the arteries of the financial system, bind money in banks that no longer make new loans.
County Bank, which was the largest bank in Merced County, California, from the window in March 2008 the announcement of the first annual loss in its 30-year history, news, the depositors, $52 million back to discount loans prompted a 4.8 million dollars.
In the fall of 2008, the Bank was regularly bonds the fed, the more than two dozen loan amounts, which reached over $ 60 million. Borrowing up to the day it in error the taking of a final loan for US$ 55 million on Friday, February 6, 2009, the continued.
Thomas hawker, the former Chief Executive, said that the loans keep helped the Bank in the business, which required cash deposits dwindled. But he said that it was clear in hindsight, the County Bank dead was financing the construction of new houses in the California Central Valley on the legs all the time, thanks to the once lucrative focus.
"I think in most cases, it is a lifeline, offering to survive the kind of a bridge," said Mr hawker, who left the Bank in 2008. "In the case here, Merced County ground was zero for everything that possibly could have wrong with the economy."
The discount window design, original is a fundamental characteristic of the Central Bank to Bank to mitigate runs and other cash squeezes. But access is limited to historically on healthy banks with short-term problems.
This limits moved from user-defined Law 1991 when Congress formally the Fed help banks limited. A Congress investigation showed that more than 300 banks, between 1985 and 1991 owed money to the fed at the time of its failure is failed. Critics said lending the Fed increases the costs for these errors had.
The Central Bank has been castigated for a generation, but in 2007, with a view to a new banking crisis, the Fed once again started to expand access to the discount window. It reduces the cost of borrowing and began with loans for the extension of the duration of up to 30 days.
More than a thousand banks have taken advantage. A review of the Federal Republic of data, including the records shows published last week, the Fed then is at least 111 of those banks failed. The Fed money owed eight on the day, as the not including Washington Mutual, the largest failed bank in American history.
The Fed said that it the law in all of their emergency loans fully respected and his actions, including loans through the discount window to limit the impact of the crisis were determined.
Charles Calomiris, finance Professor at Columbia University, the discount window has studied loans during the previous crises, said that the Fed not enough information for the public to determine whether some of the recipients were erected in inappropriate and should have more quickly fail approved had released.
"We know that the Fed has?" No, we do not, "he said." "But the Fed politicized more than at any point in its history became, and do very much, I fear that many of the Fed discount window loans may be only part of a political calculation."
Had the Fed lending significant advantages in some cases, if the loan goes the mandate meant.
The F.D.I.C. is the banks almost always on Friday night, so that the new owners two days before reopening. In some cases maintain the Fed banks up to the next Friday. The Bank of Clark County, Vancouver, Washington, was his first discount window loans on Monday, Jan. 12, 2009. It borrowed $8 million Monday, Tuesday and Wednesday, then US$ 14 million on Thursday and Friday. Then the F.D.I.C. be closed its doors.
In other cases, it became clear the Fed lending to banks such as the extent of their financial problems stopped. Alton Gilbert, a former official at the Federal Reserve Bank of St. Louis, one oft-cited study of the Fed discount window wrote the financing in the 1980s, said that some banks with fed loans on their books during the recent crisis has failed. The Central Bank suspended often several months before they failed the lending.
Some experts said still, additional control was installed for a subset of the banks, receive the strong support even though she faced clear problems.
The most common visitors to the window were three subsidiaries of the FBOP, a bank holding company based in Oak Park, Illinois
Park National Bank in Chicago regularly borrowed from April 2008 until the day of their failure in October 2009, amounts, the 129 loans at $345 million achieved the longest period of sustained support for each bank, which is during the crisis failed. Park to the some of the money financing of the acquisition of the assets of other banks, extended his own record and potentially increase the cost for the errors or inaccuracies. Bloomberg news reports first the details of the Fed discount window lending to the company.
Discount, California National Bank of Los Angeles and Pacific took more than 100 loans from the window two more failed banks owned by FBOP National Bank of San Francisco, although both bond some months before failing.
Marvin Goodfriend, Professor of Economics at Carnegie Mellon University, said that such loans, which the fed in the inappropriate position of deciding on the fate of the individual banks, decisions, he said should be made by elected representatives.
"What I think is the lesson is, that the Congress to clarify the limits of an independent fed and credit policy," said Professor Goodfriend. "There should be a mechanism so that the Fed not, these decisions for taxpayers to make."
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