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Federal Reserve warns discount window becoming too transparent

During the height of the financial crisis, the Federal Reserve decided to offer unprecedented low rates when lending money to banks through its discount window. If the central bank were to make such an offer again, the Dodd-Frank Act drastically changes what the Fed will have to disclose and, more importantly, when. Speaking before a House subcommittee Wednesday, Thomas Baxter, the executive vice president and general counsel at the New York Federal Reserve, and Scott Alvarez, the general counsel of the Federal Reserve Board of Governors, said such information cannot be released too quickly in order for the government to provide the necessary liquidity to a market in chaos. “We remain concerned that a more rapid release of information about borrowers accessing the discount window and emergency lending facilities could impair the ability of the Federal Reserve to provide the liquidity needed to ensure the smooth working of the financial system,” Baxter and Alvarez said in joint testimony. “If institutions believe that publication of their use of Federal Reserve lending facilities will impair public confidence in the institution, then institutions may choose not to participate in these facilities.” In September 2007, the Fed began lowering the federal funds rate from 5.25% to a December 2008 target of 0% to 0.25%. In August 2007, it even lowered the interest rate it charges banks that borrow through its discount window to 0.50%. It also extended $100 billion of credit through its two Maiden Lane facilities to purchase assets from the failing Bear Stearns and American International Group (AIG). And between November 2008 and March 2010, the Fed purchased $1.25 trillion of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac in order to relieve pressure on the housing market, according to the last Congressional Oversight Panel report released in March 2011. The Fed also purchased another $175 billion in Fannie and Freddie debt. Most of these programs and others initiated during the crisis ended during 2010. Baxter and Alvarez maintain that the Fed has incurred no credit losses to date, and they do not expect to incur a loss on any outstanding programs. The Dodd-Frank Act required the Fed to publish detailed information on these programs on Dec. 1, which it did. But on March 31, 2011, the Fed also released documents related to specific discount window loans made during the crisis. This disclosure came about from a Freedom of Information Act request from Bloomberg and the Fox News Network. But going forward, the Dodd-Frank Act requires the Fed to disclose discount window lending and other operations with a two-year lag. The Fed must also release information for any emergency lending facility, such as Maiden Lane, on a one-year lag. These lags, Baxter and Alvarez said, strike an important balance between what the public should know about these transactions and ensuring banks have the necessary protection to participate when they need to. “Experience has shown that banks’ unwillingness to use the discount window can result in more volatile short-term interest rates and reduced financial market liquidity that, in turn, can contribute to declining asset prices and reduced lending to consumers and small businesses,” Baxter and Alvarez said. Write to Jon Prior. Follow him on Twitter @JonAPrior.

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