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Wednesday, December 07, 2011 9:31 PM

Demand for Dollars from Fed's Discount Window Swells in Europe by 12,735% After Fed Cut Rates on Dollar Swap Lines

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On November 30, Central Banks Cut Rates on Dollar Swap Lines which made borrowing at the Fed's discount window cheaper for foreign banks than US banks.

As a result, Dollar-Loan Demand Swells In Europe and Japan

The European Central Bank said demand for three-month dollar loans surged after it cut the cost of the financing almost in half in a coordinated action last week with five other central banks including the Federal Reserve.

The European Central Bank, based in Frankfurt, will lend $50.7 billion to 34 euro area banks on Thursday for 84 days at a fixed rate of 0.59 percent. That compares with the $395 million lent in the last three-month offering on Nov. 9 at a rate of 1.09 percent. The E.C.B. also lent five banks $1.6 billion in its regular weekly dollar operation, up from $352 million last week. The E.C.B. does not disclose the identity of the banks that borrow.

Six central banks including the Fed, the European Central Bank and the Bank of Japan cut the cost of emergency dollar loans by 50 basis points on Nov. 30 in an effort to ease a credit shortage worsened by Europe’s sovereign debt crisis. A basis point is equal to 0.01 percent. On Tuesday, demand for seven-day dollar loans from the Bank of Japan surged to $25 million from $1 million.

“The reduction in the rate seems to have been enough to reduce the stigma in using the facility,” said Vincent Chaigneau, rate strategist at Société Générale in Paris.
Discount Window Borrowing Swells by 12,735%

$395 million to $50.7 billion is quite a move. Percentage-wise it is approximately 12,735%. In Japan, demand for loans increased from $1 million to $25 million, a mere 2,400%. The actual demand in Japan is trivial. In Europe, it's not.

Who is desperate for the cash? The ECB will not say. Does the Fed even know or care?

Further information on the discount window, including interest rates, is available from the Federal Reserve System's discount window web site.

Discount Window

US banks going to the Fed's discount window pay .75% for primary credit. European banks going to the Fed's discount window paid a fixed rate of .59%.

That said, US banks are generally not using the discount window given adequate liquidity.

Mike "Mish" Shedlock
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