Capital Markets

Cash-Thirsty Banks Swarm the Fed

The level of borrowing from the Federal Reserve hits an all-time weekly high that is twice the previous record.
Stephen TaubOctober 3, 2008

Consumers and businesses looking to borrow money are not the only ones being shunned by banks — the banks themselves are being shut out as well. As a result, they are going to their lender of last resort: the Federal Reserve Bank.

U.S. banks are borrowing money from the Fed’s discount window at a record pace. According to Reuters, banks borrowed $367.8 billion per day from the Federal Reserve in the week ended October 1. That was nearly double the previous record daily average of $187.75 billion — which was set the prior week.

With the interbank lending markets currently frozen and commercial paper markets in a state of semiparalysis, the Fed is the only game in town at the moment. “It gets more and more stunning,” Michael Feroli, an economist at JPMorgan Chase, told Reuters. “You’re just seeing huge increases across the board. It tells you that the paralysis is massive.”

CNBC theorizes that banks are upping their borrowings to meet depositor requests for their money. Presumably, depositors who have more than the $100,000-per-person ceiling for FDIC insurance at a single bank are looking to spread their money among multiple banks or put it in money-market funds marketed by mutual-fund companies, since those are now going to be insured by the government as well.

The federal bailout bill, passed by the Senate and awaiting House approval, could stem the outflow of deposits since it would up the FDIC insurance limit to $250,000 per person on the account.

The United States is not the only place where banks are tapping the Central Bank for funds. According to Bloomberg, on Thursday banks borrowed more than 15 billion euros from the European Central Bank at its emergency rate for a third day. This pushed the amount borrowed over a three-day period to a record, according to the report.

“Trust has completely left the system,” Thorsten Polleit, chief German economist at Barclays Capital in Frankfurt, told the wire service. “I don’t see a return to more normal conditions anytime soon.”