Dexia Drew Most From Discount Window in Record Week in 2008

Dexia SA, the largest lender to local governments in Belgium, borrowed more than any other bank from the U.S. Federal Reserve’s discount window during the week in October 2008 when use of the program surged to a record.

Dexia borrowed $31.5 billion on Oct. 24 of that year through its New York branch, according to Fed documents released today in response to a Freedom of Information Act request. Total borrowing from all banks using the discount window was $111 billion on Oct. 29, the record weekly total, according to previously released data. Dexia had an outstanding balance of $26.5 billion on that day.

Dexia, based in Brussels and Paris, and foreign banks including Dublin-based Depfa Bank Plc and Bank of Scotland Plc dominated the list of borrowers from the U.S. central bank’s last-resort lending program as markets seized up following Lehman Brothers Holdings Inc.’s failure. The discount window, established in 1914, is the Fed’s primary program for providing cash to banks to help them avert a liquidity squeeze.

“When the perfect storm hits, you find out who’s prepared and who wasn’t,” said Vincent Reinhart, the Federal Reserve’s director of monetary affairs from 2001 to 2007. “Borrowing from the Fed is evidence of a lack of preparedness.”

Dexia’s outstanding balance at the Fed has been reduced to zero, Ulrike Pommee, a spokeswoman for Dexia, said in an e-mail.


“This information is backward-looking,” she said. “We experienced a great deal of tension concerning the liquidity of the dollar at the time of the crisis. The Fed played its role as central banker, providing liquidity to banks that needed it.”

The foreign banks took advantage of Fed lending programs even as their host countries moved to prop them up or orchestrate takeovers.

Dexia received billions of euros in capital and funding guarantees from France, Belgium and Luxembourg during the credit crunch.

Depfa was taken over in October 2007 by Hypo Real Estate Holding AG, which in turn was seized by the German government in

2009. Oliver Gruss, a spokesman for Depfa’s parent company, didn’t immediately return requests for comment.

Bank of Scotland, which had $11 billion outstanding from the discount window on Oct. 29, 2008, was a unit of Edinburgh-based HBOS Plc, which announced its takeover by London-based Lloyds TSB Group Plc in September 2008.

HBOS Acquisition

The borrowings in 2008 didn’t involve Lloyds, which hadn’t completed its acquisition of HBOS at the time, said Sara Evans, a spokeswoman for the company, which is now called Lloyds Banking Group Plc.

“This is historic usage and on each occasion the borrowing was repaid at maturity,” Evans said. “The discount window has not been accessed by the group since.”

Other discount-window borrowers on Oct. 29, 2008, included Societe Generale SA, France’s second-biggest bank; and Norinchukin Bank, which finances and provides services to Japanese agricultural, fishing and forestry cooperatives.

Tokyo-based Norinchukin borrowed $6 billion that day, and Paris-based Societe Generale borrowed $5 billion.

The Fed kept the discount-window loans secret for more than two years, after Chairman Ben S. Bernanke told Congress in November 2008 that data on borrowers might taint them as not creditworthy. The central bank released the documents after court orders upheld FOIA requests filed by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC.

Emergency Programs

In all, the Fed was ordered to release 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. Last December, the Fed released databases on the emergency programs, a requirement of the Dodd-Frank Act enacted in July 2010. Dodd-Frank didn’t require the release of information on discount-window borrowings during the crisis.

According to weekly Fed data that don’t break out loans to specific institutions, borrowings from the six emergency-lending programs targeted at banks, securities firms and other financial companies totaled $818.2 billion on Oct. 29, 2008. Those loans are in addition to the $110.7 billion outstanding that day at the discount window.

The emergency programs were created to supplement the discount window, which allows banks to get cash in exchange for collateral pledges when they encounter a liquidity squeeze. As banks’ bond prices plunged during the credit crisis, driving up their borrowing costs, they could tap the window for loans at below-market rates.

Discount Rate

Yields on U.S. bank bonds averaged 9.77 percent on Oct. 29, 2008, according to Bank of America Merrill Lynch index data. The rate for borrowing from the Fed at the discount window on that day was 1.25 percent, according to Bloomberg data.

Wachovia Corp., based in Charlotte, North Carolina, borrowed $29 billion from the discount window on Oct. 6, the data show. The bank agreed in principle to sell itself to Citigroup Inc. on Sept. 29, before announcing a definitive agreement to sell itself to Wells Fargo & Co. on Oct. 3. The Wells Fargo deal closed at the end of 2008.

Wells Fargo spokeswoman Mary Eshet declined to comment on Wachovia’s discount-window borrowing.

Wachovia had $15 billion remaining from the Oct. 6 loans as of Oct. 29, 2008.

Bank ‘Stigma’

Use of the discount window by banks that were least able to support themselves may undermine efforts in recent years by the Fed to combat the “stigma” associated with the program. Some banks had shown reluctance during prior financial crises to use the window because doing so, “if it became known, might lead market participants to infer weakness,” Bernanke said in an April 2009 speech.

On Aug. 17, 2007, the Federal Reserve cut the rate on discount-window loans, and then-New York Fed President Timothy F. Geithner encouraged banks to borrow from the window as “a sign of strength.” Geithner is now Treasury secretary.

Five days later, Citigroup, Bank of America Corp., JPMorgan Chase & Co. and Wachovia said they borrowed $500 million each from the window “to take a leadership role in demonstrating the potential value of the Fed’s primary credit facility and to encourage its use by other financial institutions.”

According to previously released Fed data, discount-window borrowings surged to $2.001 billion that day, from $4 million a week earlier. By Sept. 26, 2007, borrowings from the window had fallen back to zero.

Bear Stearns

In April 2008, after Bear Stearns Cos. collapsed and was taken over by JPMorgan, borrowings from the window surpassed $10 billion for the first time, and didn’t fall back below that level until March 2010.

The Fed’s most recent weekly report shows borrowings from the discount window stood at $7 million as of March 23, 2011.

Some of the records the Fed released were originally requested under the FOIA, which allows citizens access to government papers, by the late Bloomberg News reporter Mark Pittman.

A federal district court judge ruled in 2009 that the Fed had to disclose the records in the Bloomberg case, and a New York-based appeals court upheld that ruling.

The Clearing House Association LLC, a group of 20 of the nation’s largest commercial banks, had asked the U.S. Supreme Court to shield the records from public view. The group said the unprecedented disclosure might dissuade banks from accepting emergency loans in the future.

Last week, the Supreme Court rejected the appeal, setting the timetable for today’s data release.

Clearing House members include Citigroup, Bank of America, Bank of New York Mellon, Comerica Inc., Deutsche Bank AG, Fifth Third Bancorp, HSBC Holdings Plc, JPMorgan Chase & Co., KeyBank, M&T Bank Corp., Royal Bank of Scotland, UBS AG, U.S. Bancorp and Wells Fargo.

(Updates with Depfa and Bank of Scotland in third paragraph, Societe Generale and Norinchukin in 13th paragraph.)
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