Fed: We Don’t Know What Happened to $586B in Swaps

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As part of a currency-swap plan active from 2007 to 2010 and recently revived to fight the European debt crisis, the U.S. Federal Reserve lent money to central banks that in turn lent those funds to borrowers whose names are unknown even to the Fed itself.

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The Federal Reserve lent dollars to other central banks, which then auctioned them to local commercial banks. In December 2008, lending through this program peaked at $586 billion.

While all the transactions between the Fed and other central banks are disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent, leaving the U.S. government and public in the dark on the beneficiaries and possible risks from one of the Fed’s largest crisis-loan programs to date.

The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion, up from $400 million, after the November 30 announcement that the Fed, along with the ECB and four other central banks, lowered the interest rate by half of a percentage point.

The secrecy of the currency-swap program contrasts sharply to the unprecedented transparency at the Fed of late, which was compelled by the 2010 Dodd-Frank Act and court-upheld Freedom of Information Act requests to release details on more than a dozen Fed programs used to combat the U.S. financial crisis from 2007 through 2010.

Fed Chairman Ben Bernanke began this year holding regular press conferences and has said he is considering ways to make the Fed’s objectives more clear to the public.

But Michelle Smith, a Fed spokeswoman, said there is “no formal reporting channel” for the identities of borrowers from other central banks. Technically, the central banks are the Fed’s only counterparties on the swap lines, and thus assume any credit risk.

“U.S. taxpayers have never lost a penny” on the program, she said. “Decisions about disclosure by foreign central banks of their financial arrangements with financial institutions in their jurisdictions is an issue for the foreign central banks.”

Foreign central banks borrowed dollars from the fed for terms as long as three months in return for euros, pounds, and yen. The ECB accounted for 80 percent of total dollars lent during the financial crisis, according to the U.S. Government Accountability Office. And the ECB won’t publicly disclose names of borrowers under any circumstances and doesn’t share the identities outside the 17 euro-area central banks, said a spokesman.

The Bank of Japan, which tapped 3.9 percent of the aggregate swap dollars, has no plans to publicize borrowers’ identities, and declined to comment on whether it shares those names with the Fed. The Swiss National Bank, which accounted for 4.6 percent of swaps, doesn’t publish counterparties “as a matter of principle,” said spokesman Walter Meier.

The Bank of England doesn’t publish details of individual financial institutions’ use of its facilities, as doing so might hurt confidence in banks. If the bank does disclose support, it only does so “when conditions giving rise to potentially systemic disturbance have improved,” it said in its annual report.

The Fed swap program had a combined balance of $2.3 billion in outstanding loans as of December 7 for all five participating central banks.

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