Federal Reserve data showing UBS and Barclays ranked among the top users of $3.3 trillion from emergency programmes is stoking debate on whether US regulators bear responsibility for aiding other nations’ banks.
UBS was the biggest borrower under the Commercial Paper Funding Facility (CPFF), with $74.5 billion overall, more than twice as much as Citigroup, the top US bank recipient, according to the data released yesterday. London-based Barclays took the biggest single amount under another program that made overnight loans, when it got $47.9 billion on September 18, 2008.
“We’re talking about huge sums of money going to bail out large foreign banks,” said Senator Bernard Sanders, the Vermont independent who wrote the provision in the Dodd-Frank Act that required the Fed disclosures. “Has the Federal Reserve become the central bank of the world? I think that is a question that needs to be examined.”
The first detailed accounting of US efforts to spare European banks may add to scrutiny of the central bank, already at its most intense in three decades. The Fed, which released data on 21,000 transactions, said in a statement that its 11 emergency programmes helped stabilise markets and support economic recovery. The Fed said there have been no credit losses on rescue programmes that have been closed.
The growth of the US mortgage-backed securities market and the dollar’s status as the world’s reserve currency enticed overseas banks such as Zurich-based UBS to buy assets in the country before 2008. They paid for the holdings with US dollars, and when funding seized up, the Federal Reserve refused to take the risk that European firms would unload the assets and further depress markets for housing-related investments.
‘Much worse’
“Things would have been worse if they hadn’t lent to foreigners,” said Perry Mehrling, senior fellow at the Morin Center for Banking and Financial Law at Boston University and author of “The New Lombard Street: How the Fed became the Dealer of Last Resort.” “We’re finally getting to understand the role of the Fed in the world.”
Fed spreadsheets showed the central bank became the world’s lender of last resort as dollars flowed to European banks as well as Bank of America and Wells Fargo & Co, among top borrowers from the Term Auction Facility at $45 billion each.
Goldman Sachs Group, which posted record profit last year, borrowed more than $24 billion from another programme. Milwaukee-based Harley-Davidson and Fairfield, Connecticut- based General Electric Co sold commercial paper, a form of short-term debt, to the Fed under a programme that lent as much as $348.2 billion at its peak.
Sanders, the Vermont senator, said yesterday he plans to investigate whether banks profited by borrowing from the Fed and investing the funds in Treasuries, benefiting from the difference in interest rates.
‘Bailout Protection Act’
US Representative Mike Pence, an Indiana Republican, said he planned to introduce a “European Bailout Protection Act” to restrict the flow of International Monetary Fund loans to European countries. He said he was responding to reports that US officials might bolster a European fund designed to deal with this year’s debt crisis, which has spread from Greece to Ireland.
Edwin Truman, a former Fed official who is a senior fellow at the Peterson Institute for International Economics in Washington, said any push to confine the Fed’s role to US banks would create a “massive exercise in financial protectionism.”
