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.

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Fed Loans to Commercial Banks Rise

July 24, 2008 by · Leave a Comment
Filed under: Industry News 

Looks like commercial banks are feeling the squeeze from our current economic situation.  According to Bloomberg, while securities firms showed a zero balance for a month now, Federal Reserve loans to commercial banks have risen to a record level.

Commercial banks increased their loans from the Fed discount window by $2.47 billion dollars to average out to $16.4 billion dollars a day.  Now that is a lot of happy meals.  Other facts are that the banks have now written off $468 billion dollars assets since this crisis started in early 2007.  We have also seen our benchmark interest rate brought down to its current level of 2% percent.

In the article, Louis Crandall (Economist) is quoted in saying a brilliant observation, “It reflects the growing use of the discount window as not just an overnight backstop but as a permanent source of funding”.

We are still far short of our single day record of $45.5 billion that came the day after 9/11 in 2001.  The reported daily average during that week was $11.7 billion dollars.  The stated purpose of these loans are to provide stability for the financial system that is still reeling from the “subprime” housing crisis.  It is in my opinion that we might be setting a bad example by not letting some of these institutions fail after such rampant bad lending practices that lead up to this current crisis.  In the end, we should expect either to see this lending stop and maybe some bank failures to purge the excess from the system or more inflation as these loans become permanent and in that case the banks will use these loans to deploy more capital in the market.  Time will tell.

Bloomberg Article