Troubled bank? Fed charges bank 7% on overnight loan

July 12, 2009 by · Leave a Comment
Filed under: Industry News 

Wall Street Journal Blogs posted a piece about a single bank being charged a inordinate amount of interest on a overnight bank loan when the If you are being charged 7% on a overnight loan from another bank then you know that you are in trouble.  According to the article, the last time this happened was when Lehman Brothers failed.  A 7% rate on a overnight loan says there is a “real” chance that you will not be replay that loan the next day.  The NY Federal Reserve knows which undisclosed bank it was.   It will be interesting to watch how this plays out and if it is actually a large banking institution or if it is a smaller regional or local bank?

News (Wall St. Journal Blogs):

There’s been some chatter in the market this week about whether a bank may be in trouble. The source of the concern is an anomaly in the federal-funds rate, that’s the rate banks charge each other to borrow money overnight.

Banks, however, have some discretion based on the borrowing bank’s collateral and the supply and demand in the marketplace. So, it’s not unusual to see the actual rate on overnight loans vary slightly. For instance, on June 23, the rate was between 0.1% and 0.375%. On June 24 it was between 0.1% and 0.5%.

The New York Fed says there’s settling of accounts at the end of the month that can cause the range to expand on those days, but even including end-of-the-month settlements, the rate hasn’t been above 1% since Dec. 4 when it topped 1.5%.

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