The Federal Reserve as Global Lender of Last Resort, 2007-2011

Abstract

Passage of the Dodd-Frank financial reform bill, in conjunction with a Supreme Court ruling supporting a Freedom of Information Act request, required the Federal Reserve (Fed) to disclose bank-specific information about its emergency lending during the financial crisis. The disclosures revealed the extent to which the Fed served as a global lender of last resort, providing dollar liquidity to foreign banks that were having difficulty funding their dollar-denominated liabilities. I exploit the exogenous nature of these disclosures on two levels. First, I use the disclosed information to evaluate the Fed's global lending during the crisis. My findings indicate that the Fed supported foreign banks in countries in which U.S. money-center banks had high loan exposures, which suggests that the Fed served the interests of major U.S. banks. Second, I explore the congressional response to the revelation of the Fed's massive global lending. I analyze an "Audit the Fed" vote in the House of Representatives that would end the Fed's confidentiality about the banks and countries it supports and potentially reduce its monetary policy independence. I find the influence of U.S. money-center banks extends to Congress by way of campaign contributions: contributions from these banks significantly reduce the likelihood that a representative will vote in favor of the bill. In addition, I find that right-wing representatives are substantially more likely than their left-wing peers to support the bill, which suggests that new congressional coalitions are forming on the role of the Fed in the (global) economy.

Keywords: Federal Reserve, lender of last resort, financial crises

JEL Classification: E5, E58, F34, F36, G28, H1