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Federal Reserve May Accept ‘Very Safe’ Funds from Foreign Banks

June 03, 2008 06:01 AM
by Anne Szustek
The Fed would consider saying yes to collateral from “sound” international banks, said Donald Kohn, the Fed’s vice president.

30-Second Summary

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During a Thursday speech at Columbia University’s business school, Kohn suggested that central banks could step in and serve as a safety net to flailing global banks.

In fact, central banks have been doing this for some time. The Fed, as Kohn pointed out, helped keep Bear Stearns and other banks afloat during a global bank run in March. Britain nationalized Northern Rock in February after the mortgage lender saw the country’s first bank run in a century. And the central banks of Denmark, Sweden and Norway stepped in with a 1.5-billion-euro line of credit last month to help prop up Iceland’s economy.

The Fed, the Swiss Central Bank and the European Central Bank—which regulates the euro—announced in December that they would coordinate responses to commercial bank emergencies with a term auction facility. This program was expanded in early May.

“Due to the public stigma and possible share price implications associated with taking a loan,” writes the Council on Foreign Relations, the program is meant to help commercial banks “that aren’t at risk of collapsing—but need short-term loans—to get them anonymously.”

The auction permits banks to borrow from the Fed for a 28-day period. But Kohn insists that any sort of Fed-backed lending facility should be but a stop-gap measure.

“I start from the premise that central banks should not allocate credit or be market makers on a permanent basis. That should be left to the market—or if externalities or other market failures are important, to other governmental programs,” Kohn said during his talk.

Headline Link: ‘Fed Might Accept Foreign Collateral: Kohn’

Background: The weak dollar, America and the recession question

Reactions: ‘Money Markets and Financial Stability’

Opinion & Analysis: Coordination of central banks pays off

Reference: FindingDulcinea’s Web Guides to the U.S. Economy and Investing

Related Topics: European central banks step in to keep businesses afloat

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