Will the Loss of Fed Secrecy Cripple Emergency Lending?

More

After a court battle spanning a few years, the Federal Reserve must disclose the details of its emergency lending during the financial crisis. In the past, its short-term discount window lending to commercial banks was kept confidential. But today, the Supreme Court rejected, without comment, the banking industry's call to overturn a lower court ruling ordering disclosure. Bloomberg News originally brought the suit, having demanded the data through a Freedom of Information Act inquiry. Will this be good or bad for the financial market? It depends on how the change evolves.

Brent Kendall from the Wall Street Journal explains the main reason why the Fed and some others in the financial industry would have preferred emergency lending details to remain secret:

The Clearing House Association, a trade group representing large banks, had warned that releasing the borrowing data would allow the public to draw inferences "whether justified or not" about the banks' current financial conditions.

To be sure, once the financial crisis lending is made public, reporters, financial analysts, and Fed watchdog Rep. Ron Paul (R-TX) staffers will scrutinize it, looking for dirt. Did Bank Q get a disproportionate amount of assistance compared to Banks X, Y, and Z? Are there just a handful of usual suspects that dominate emergency lending, suggesting that they are unstable? How many billions of dollars in emergency lending are going to a few institutions?

This may, indeed, cause some people to question the financial condition of some banks -- but it should. If you're an investor, this information will enhance your understanding of the financial industry's players. If you know one bank needed a huge loan from the Fed and the attributes that caused the need for that loan haven't changed, then you might choose to invest in another bank instead. That's a perfectly legitimate analysis to make on the part of an investor, and this information should be available to enhance transparency.

The problem, however, can occur with timing. If the Fed hopes to stabilize markets in times of turmoil, then it needs secrecy to remain intact in the short-term. For example, back in 2008, it helped to slow irrational panic in part through emergency lending. If all data was immediately disclosed, panic would have instead been intensified.

But once that panic has subsided, this data can be released. Although investors may look at banks that needed more assistance than average with a wary eye, they won't shun them altogether. This is pretty obvious by looking at how well the big banks have all rebounded since the financial crisis. Virtually all of them received support, and many investors have resumed buying their equity and debt.

At this point, the timing prescribed by the ruling isn't clear. According to the WSJ article, the Fed has not disclosed when it intends to release that financial crisis lending information. But providing two years or so lag should be plenty of time to allow markets to calmly digest emergency lending data.

Banks might not like their emergency borrowing revealed, but it's hard to see how a reasonable disclosure lag time would result in their ignoring the discount window altogether. After all, they would still surely prefer to obtain emergency lending in times of credit crises and market panic than fail.

Jump to comments
Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
Get Today's Top Stories in Your Inbox (preview)

Social Security: The Greatest Government Policy of All Time?

It's the most effective anti-poverty program in U.S. history. So why do some people hate it?


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In