February 20, 2008

"Dodgy Collateral" Fuels New Bank Borrowing

U.S. banks have borrowed almost $50 billion in the last month from the Federal Reserve, using an expanded government program that some critics fear will deepen instability long-term.

The Financial Times of London reports that the Reserve’s Term Auction Facility has enabled the government to reduce “financial stress” by “channelling liquidity into the banking system.”

It achieves this by allowing banks to “borrow at relatively attractive rates against a wider range of their assets than previously permitted.”

One analyst, however, told the Times that the move allowed banks to borrow more freely against “dodgy” or “garbage” collateral, and said the situation was “perilous.”

Overall, however, the U.S. government program is popular with banks, and may even be expanded.

Source:

“U.S. banks borrow $50bn via new Fed facility”
Financial Times, February 18, 2008

2 thoughts on “"Dodgy Collateral" Fuels New Bank Borrowing

  1. Like a teenager with their first creditcard, the U.S. government is trying to borrow their way out of debt. This, instead of solving their economic crisis, will in turn perpetuate their slow decline into recession. Now, they will have to take out another fifty billion dollar loan to cover the loan they just took out. My only question now is when does the bank say “no”.

  2. Sure seems to me that this article addresses reverse borrowing where the federal government is the “bank” in this case and the commercial banks are the consumers. In this case this article is alarming as it hasn’t been readily communicated via the media that commercial banks were in need of borrowing outside of the mortgage industry. Perhaps that’s what the article is alluding to…???