Fed Discount Window Loans Cushioned Small Banks in 2010

Small banks based in towns ranging from Munich, North Dakota, to Cairo, Georgia, were among borrowers from the Federal Reserve’s discount window during the third quarter of 2010, the Fed showed in the first release of once-secret loan data as required under the Dodd-Frank Act.

The transactions occurred as the U.S. economy completed a year of growth following the worst recession since the Great Depression. Unemployment averaged 9.5 percent in the third quarter of 2010, and the Fed was preparing to announce in November a second round of bond-buying known as quantitative easing to spur the recovery and revive the job market. The release covers the period from July 22, 2010, to Sept. 30, 2010.

The third-quarter 2010 borrowing levels show a steep decline in the discount window’s use after the financial crisis. So-called primary credit loans outstanding on Sept. 29, 2010 totaled $99 million, compared with a record $110.7 billion on Oct. 29, 2008, as banks sought cash after the collapse of Lehman Brothers Holdings Inc. in September that year.

The discount window is the Fed’s main tool for providing cash to banks that run into temporary funding shortfalls. The loans are fully collateralized and made by the Fed system’s 12 reserve banks.

The Fed has three categories of loans. Primary credit is for healthy banks with short-term funding needs. Secondary credit is for troubled banks, and seasonal credit is for banks that have uneven funding flows. The Dodd Frank Act of 2010 required disclosure of discount window loans with a two-year lag.

Rapid Decline

Primary credit began to decrease rapidly as the Dodd-Frank Act became law on July 21, 2010. Discount window loans to healthy banks fell from $19 billion in the first week of January 2010 to $4.2 billion at the end of May to just $26 million at the end of July.

On a conference call with reporters today, Fed officials said reserve bank officers advised borrowers that the loans would be made public once Dodd Frank was enacted. The officials spoke on condition they not be identified.

One of the largest borrowers was Gorham Savings Bank, from Gorham, Maine, according to the data. The bank took out a loan of $70 million on Aug. 5, 2010, in the largest single amount during the period. The bank had $136 million in collateral, after haircuts, that included commercial real estate loans and U.S. Treasury and agency securities.

Loan Repaid

The Fed said the loan was repaid the next day, and it was listed as “primary credit,” meaning the bank was deemed a well-capitalized and sound institution by the Fed discount window officer.

Dan Hunter, Gorham’s chief financial officer, said in a telephone interview the bank used the discount window “in the normal course of business” to aid with securities settlement. The loan was a “clean and simple way” to facilitate a transaction, he said, and to test the bank’s access to Fed credit.

The loan data showed that 80 percent of the credits given to banks were repaid within five days during the period.

The Fed has never voluntarily released information on the discount window out of concern that disclosure would keep banks away from the facility.

“Banks were reluctant to rely on discount window credit to address their funding needs,” Bernanke said in an April 3, 2009, speech describing how the Fed used its tools during the crisis. “The banks’ concern was that their recourse to the discount window, if it became known, might lead market participants to infer weakness -- the so-called stigma problem.”

First Time

The Fed in March 2011 released discount-window loan documents for the first time after court orders upheld Freedom of Information Act requests filed by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. In all, the Fed released more than 29,000 pages of documents, covering the discount window and several Fed emergency-lending programs established during the crisis from August 2007 to March 2010 as a result of the FOIA requests.

The loan data showed the biggest borrowers from the Fed’s backstop during the crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the final week of October 2008.

The Monetary Control Act of 1980 says that a U.S. branch or agency of a foreign bank that maintains reserves at a Fed bank may receive discount-window credit.

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