It is hard to argue that the banks didn't need the Fed for survival.
The Federal Reserve is getting rid of documents of about 21,000 transactions with confirmed notions that it lent out without any restraints trillions of dollars to financial institutions. And that the central bank may have actually helped banks get back on their feet.
Keefe, Bruyette & Woods recently conducted a research study and found that the Fed is smoothing out their actions. Banks have divested around $16 billion of troubled assets from their statement of assets and liabilities, according to Ben Protess of DealBook in a statement a week ago. In general, loan books are also smaller as banks are becoming careful lenders.
Similarly important is that banks’ own debts look better. Large banks have reduced corporate loan losses in six consecutive quarters, as noted by K.B.W. research, adding that the non-performing construction loans dropped 11 percent in the third quarter while failed commercial and industrial loans fell 5 percent in the most recent period. Banks are recuperating with fewer losses than those loans.
There is improvement in credit exposures for large banks during the third straight quarter, as banks decrease their percentage of failed loans to 3.45 percent from a 19 base point from last year. Though the result is worse than the 2006 ratio of .48 percent, still, this can be considered as progress.
According to Jeffrey Harte, analyst at Sandler O’Neill & Partners who covers banks, including Bank of America, Goldman Sachs & JPMorgan, things are getting much better now. The Fed’s support was crucial for them to survive and getting through the liquidity freeze was what helped them turn around the Great Depression. He said that it’s hard to make the intellectual case that they didn’t need it.
The Fed’s lending was crucial because it let banks go on when they wouldn’t trust each other enough to lend.
Typically, banks utilize customer deposits to lend to companies and individuals or back trade. It is a requirement from regulators that the banks keep a certain amount of reserved money to back these loans and trades. Part of this procedure is the banks’ reliance on short-term overnight financing from other banks. But when the Lehman Brothers collapsed, banks became cautious in their lending activities which have become a threat to many financial institutions.
When this happened, the Fed interceded and lent to banks together with the help of its primary dealer credit facility, the PDCF through which it provided overnight lending to banks from March 2008 until February 2010. Several other lending programs have been established by the Fed to support institutions from commercial paper to asset-backed securities to money-market funds.
But the Fed didn’t always require banks for decent collateral, there are many securities that are junk-rated. According to Harte, the programs are finished, many of the securities have been returned with the Fed not losing a cent. While the Fed is in the middle of publicity for its controversial bailout programs from TARP to the rescue of A.I.G., Fannie Mae and Freddie Mac, it is struggling to get back its own reputation.
