Minnesota banks leaned on the Fed during financial crisis

Article by: CHRIS SERRES and GLENN HOWATT , Star Tribune staff writers
Updated: March 31, 2011 - 11:02 PM

U.S. Bank and TCF were among those that borrowed from its discount window during the crisis, the agency revealed.

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A number of Minnesota’s largest banks borrowed heavily from the Federal Reserve’s discount window — traditionally a lender of last resort — during the dark days of the financial crisis, according to government data released Thursday.

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A number of Minnesota's largest banks borrowed heavily from the Federal Reserve's discount window -- traditionally a lender of last resort -- during the dark days of the financial crisis, according to government data released Thursday.

U.S. Bancorp of Minneapolis, TCF Financial Corp. of Wayzata, Home Federal Savings Bank of Rochester, Stearns Bank of St. Cloud and Highland Bank of St. Michael are among more than a dozen banks in the state that borrowed directly from the Fed's emergency-lending tool in 2008 and early 2009, as other sources of credit dried up or became more expensive.

The extent of the borrowing, disclosed in a huge data release by the Fed, illustrates the critical role the central bank played in preventing a financial meltdown after the collapse of real estate prices in 2008, analysts say. Even healthy banks with solid balance sheets borrowed repeatedly from the Fed's discount window well into 2009, a sign that the cash crunch in the financial system was longer and more severe than previously thought, according to banking experts.

There has long been a stigma associated with borrowing from the Fed's discount window. Traditionally, it was viewed as an emergency source of cash for banks so distressed they couldn't borrow from other banks. The Fed tried to alleviate this stigma in early 2008 by making the terms on these loans more attractive to a broader swath of banks.

However, the public has never known which banks borrowed from the Fed and why. For two years, the Fed resisted disclosing which institutions used the discount window for fear of creating the perception that the banks were weak, possibly creating runs on certain banks. But a federal judge ordered the central bank to release the data after Bloomberg News and Fox News sued for the information.

The Fed had argued that disclosure would make banks less likely to use the discount window in the future, thus making it more difficult for the central bank to ease a future liquidity crisis. The Fed has never revealed identities of borrowers since the discount window began in 1914.

"Before, if you borrowed from the discount window, that was seen as an act of desperation," said Jeanne Boeh, chairwoman of the economics department at Augsburg College in Minneapolis. "But even as it became more common, the banks and the regulators didn't want this information to come out. The stigma was still there."

The discount window was among the first tools the Fed used when the panic over subprime mortgage defaults spread. The Fed cut the discount rate it charged banks for the loans from 5.75 percent to 0.5 percent by the end of 2008. It also extended the terms of the loans, making them available for up to 90 days rather than just overnight.

A number of large banks sought to take advantage of the low rates, not expecting that their borrowing activity would ultimately be released to the public.

U.S. Bancorp was among them. The nation's fifth-largest bank tapped the discount window 21 times in 2008. As the credit crunch tightened, and rates on bank loans skyrocketed, U.S. Bancorp turned to the discount window as a cheap source of funding to settle its accounts.

'Best mechanism available'

Andrew Cecere, chief financial officer at U.S. Bancorp, said the Fed encouraged the bank to use the discount window. The thinking was that other banks would need to compete with the Fed's low rates, loosening the credit squeeze in the financial system.

"We used it because it was the best economic funding mechanism available to us," Cecere said. "This was done in consultation with the Fed. There was no stigma."

Home Federal Savings of Rochester also said it was trying to take advantage of low discount rates, rather than borrowing to meet emergency cash needs. The $880 million bank used the discount window 30 times -- borrowing $684 million in short-term loans -- between February 2008 and March 2009, according to the Fed data.

"It would be unfair to imply that utilization of the funds when rates are attractive is anything other than a prudent business decision," said Al Mannino, vice president of corporate affairs at Home Federal Savings. "We always shop for the best available rate."

However, Home Federal has seen its financial condition deteriorate since taking the Fed loans. The bank lost $29 million last year, and was recently ordered to clean up its balance sheet by federal regulators. The bank also deferred a February payment under the U.S. Treasury's Troubled Asset Relief Program, or TARP.

TCF Financial, Minnesota's third-largest bank by deposits, borrowed $290 million from the discount window between February 2008 and early 2009, according to the Fed data. A spokesman for the bank could not be reached Thursday.

By far, the most frequent user of the discount window among Minnesota banks was Stearns Bank of St. Cloud, which tapped it more than 100 times during the financial crisis, borrowing $1.5 billion in short-term loans.

All told, lending through the discount window soared to a peak of $111 billion on Oct. 29, 2008, as credit markets nearly froze in the wake of the Lehman Brothers bankruptcy.

Tony Plath, a finance professor at the University of North Carolina at Charlotte, said many banks borrowed the money as backstop cash, in case the credit markets seized up.

However, like many banking experts, Plath said he is surprised at how many banks continued to borrow from the discount window into late 2009, after the worst of the financial crisis was over.

"The frequency of the borrowing, and the magnitude of the transactions, shows just how close we came to the abyss," he said. "Without the discount window, it could have been a catastrophe."

Bloomberg News and staff writer Jim Spencer contributed to this report. Chris Serres • 612-673-4308