Fed Foreign Bank Lifelines May Reach $1 Trillion, Congress Told

The Federal Reserve may lend $1 trillion to central banks as Europe’s crisis roils markets and erodes confidence in the region’s lenders, Anthony Sanders, a George Mason University finance professor, told Congress.

Such a level would exceed the program’s peak of $586 billion reached in December 2008, when the subprime mortgage crisis in the U.S. spurred foreign banks to obtain emergency dollar funding. Under the so-called swap lines, the Fed lends dollars to foreign central banks so they can pass on the money to their local lenders.

The swaps program may “get to the $1 trillion level, or perhaps even higher,” said Sanders, a former director of mortgage-bond research at Deutsche Bank AG. He spoke today before the U.S. House of Representatives Committee on Oversight and Government Reform’s subcommittee on financial-services bailouts, led by Patrick McHenry, a North Carolina Republican.

Loans on the swaps program jumped to $54.3 billion as of Dec. 14 from $2.3 billion a week earlier, Federal Reserve data show. Draws by the European Central Bank surged after the Fed on Nov. 30 announced it would cut rates on the program. The Federal Reserve’s overall balance sheet stands at $2.9 trillion.

Fed Chairman Ben S. Bernanke yesterday told a closed-door gathering of Republican senators that the Fed won’t provide more aid to European banks beyond the swap lines and the discount window -- another Fed program that provides emergency funds to U.S. banks, including U.S. branches of foreign banks.

Size Estimates

European financial companies led by Royal Bank of Scotland Plc were borrowing about $538 billion directly from the Fed when the central bank’s emergency loans to all banks peaked at $1.2 trillion on December 2008, according to a Bloomberg News examination of data released by the Fed under last year’s Dodd-Frank Act and earlier this year under court-upheld Freedom of Information Act requests.

The Fed hasn’t provided any estimates of how large the swap lines might get, said David Skidmore, a Fed spokesman. He declined to elaborate.

“To get above $600 billion wouldn’t be a stretch,” said Desmond Lachman, a former International Monetary Fund deputy director who’s now a resident fellow at the American Enterprise Institute, a conservative public-policy center in Washington. “You’re talking about a European banking system that is huge in relation to that of the United States.”

The Fed has “no formal reporting channel” for the identities of the banks that get dollar loans from the foreign central banks, which assume the risk for any losses, Michelle Smith, a Fed spokeswoman, said in a Dec. 5 e-mail.

Josh Rosner, a banking analyst with New York-based Graham Fisher & Co., said the Fed’s swap lines may end up helping Europe support banks that might not deserve emergency loans.

“As a result of this commitment of financial support, we’re now supporting undemocratic approaches implemented largely by authorities who have demonstrated an ongoing inability to either recognize the scope and scale of the problems or come to a consensus on the proper approach,” Rosner said.

The ultimate size of the swap lines is “unknowable at this point,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE