March 31 (Bloomberg) -- For most of its 98-year history, the Federal Reserve has operated with all the transparency and enthusiasm for change of the Vatican. Now the ultra-secretive Fed is starting to change its ways, if somewhat grudgingly. Some of the new openness, such as Chairman Ben S. Bernanke’s plan for quarterly press briefings, is the central bank’s idea. Much of it comes under duress.
Today, the Fed is set to disclose which banks borrowed from its discount window during the darkest moments of the 2008-09 financial crisis. This unprecedented view of the emergency loans the Fed extended to hundreds of banks is the result of a March 21 Supreme Court decision that left intact lower court rulings ordering disclosure in lawsuits filed by Bloomberg LP, the owner of this magazine, and News Corp.’s Fox News Network. Still, the Fed won’t disclose the collateral it accepted, which would reveal the risks it took. Future discount window borrowings will be made public, though only after a two-year delay, thanks to the new Dodd-Frank financial reform law.
The discount window is the Fed’s oldest lending channel and traditionally its most secretive. Banks have been free to use it without publicly revealing the fact since the Fed’s 1913 birth. Loan demand varies, depending on market conditions and seasonal factors.
In January 2007, before the financial crisis erupted, banks owed the Fed just $1.3 billion for discount-window loans. By October 2008 borrowings peaked at $111 billion. One bank, Chicago-based Park National, owed the Fed $345 million before regulators shut it down in October 2009, according to data gleaned from a Freedom of Information Act request. The most recent data, for March 23, show banks owing just $13 million.
Banks traditionally have been reluctant to use the window, fearing that savvy investors could tell by following clues in Fed loan data and market activity. In 2003 the Fed said banks would no longer have to show an inability to raise private funds to tap the discount window, hoping to end the stigma. But when the initial wave of distress swept the financial industry in 2007, banks still shied away. “We had no luck in encouraging banks to use the window,” says Donald Kohn, a Fed vice chairman at the time.
During the worst of the financial crisis, banks paid extra to borrow to avoid the discount window’s taint by participating in a new Fed program, the Term Auction Facility. That allowed them to bypass the window and still get emergency money by bidding for it in group auctions. At its March 2009 peak, TAF provided banks with $493 billion in short-term credit--more than four times the highest volume of discount window lending, which occurred five months earlier.
Fed to Release Discount Window Borrowing Details During Crisis Today
While I do not expect any big surprises or even the slightest market reaction for this sort of "non-event", it's good to see that the pressure on the Fed is leading to some results. Hopefully, next time, they won't be able to delay things for 3 years before having to release the information.