Who’s paying 7% for overnight money?

July 2, 2009

Karl Denninger has a post over at Market Ticker that tipped me off to an odd print on the NY Fed’s website.  It seems some bank somewhere needed to pay an exorbitant price for overnight money on June 30th: 7%.

As Karl notes, with decent collateral, banks should be able to borrow much more cheaply (0.5%) at the Fed discount window.  The implication is that a bank forced to pay such a ridiculously high rate for overnight money is probably in trouble.  And that may very well be true.

There are a few reasons such a fluctuation doesn’t necessarily indicate a borrower in distress.

  • The last day of the quarter sees relatively high payment flows
  • There may be “stigma” associated with borrowing from the discount window
  • The transaction probably wasn’t large because the daily effective rate stayed well within the Fed’s target range below 0.25%

The plumbing of interbank lending markets is not my forté, so I invite reader comments, but the reasons above don’t smell right.  The last days of Q4 ’08 and Q1 ’09 both saw a slight uptick in the highest rate paid, but only a slight uptick.  (A historical search will bring up the data)

Is the stigma of borrowing at the discount window so great that a bank would be willing to pay so MUCH more to avoid it?  I guess it’s possible; if the amount borrowed was in fact very small, then the incremental interest paid on an overnight loan may be negligible.

So Karl may or may not be right, there may or may not be a borrower in distress.  My guess is he’s right.

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