Naming banks

August 27, 2009

A federal judge’s ruling that the Federal Reserve must disclose information about the $2 trillion in emergency loans it made during the financial crisis has been hailed by a number of commentators, including Matthew Goldstein, as a significant victory for transparency and accountability.

But Paul Kasriel, the economist with Northern Trust, wonders if this week’s court decision is a disturbing repeat of a legislative action during the Depression that helped spark bank runs.

The Reconstruction Finance Corp. was established Congress in 1932 to make loans, chiefly to financial institutions. An act passed in July of that year required the RFC to make monthly reports on its loans to Congress and the President. Milton Friedman and Anna Jacobson Schwartz in their 1963 classic, “A Monetary History of the United States, 1867 to 1960,” noted that Democrats pushed for disclosure of the loans as a safeguard against favoritism, and the House Speaker in August ordered that the information be made public. Kasriel explains what happened next:

This publication of the names of banks borrowing from the RFC discouraged current borrowers from continuing their borrowing and prospective borrowers from commencing borrowings out of a fear that depositors would judge this borrowing as a sign of financial weakness. By November 1932, the outstanding amount of RFC loans to banks had decreased

The historical parallel to the ruling in a lawsuit brought by Bloomberg is clear to Kasriel:

If the Fed is required to publish the names of financial institutions to which it has extended credit and this publication induces financial institutions to refrain from borrowing from the Fed, one can only speculate if this would be the tinder for another liquidity conflagration in the coming months.

This is an interesting echo, but his concern is not entirely convincing. There is a big difference, as Kasriel acknowledges, between 1932, before the New Deal and deposit insurance, and today, when the huge scale of federal intervention in the financial system is a given. And his concern is one that the judge did not find sufficiently compelling.

“The risk of looking weak to competitors or shareholders is an inherent risk of market participation,” noted Judge Loretta Preska in her decision, “information tending to increase that risk does not make the information priviledged or confidential…”

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/