Bankruptcy

Big US banks Use Fed Credit Facility to Tune of 50 Billion

By J. Michael McBride

The Federal Reserve, as part of its unprecedented measures to shore up the US banking system established a Term Auction Facility which allows banks to borrow money at good rates using less strong collateral, thus putting the Fed at risk of this weak collateral.

Quote: "US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.
...

"The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

The Fed announced the TAF tool on December 12 as part of a co-ordinated package of measures unveiled by leading western central banks to calm money markets.

The measure marks a distinct break from past US policy. Before its introduction, banks either had to raise money in the open market or use the so-called “discount window” for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure.

Here is a link to the whole article from the online Financial Times: http://www.ft.com/cms/s/0/66db756a-de5d-11dc-9de3-0000779fd2ac.html?nclick_check=1

Michael

Full post as published by Texas Lawyer Blog on February 19, 2008 (boomark / email).