Informing the public about the Federal Reserve
Why did the Federal Reserve lend to banks and other financial institutions during the financial crisis?
Intense strains in financial markets during the financial crisis severely disrupted the flow of credit to U.S. households and businesses and led to a deep downturn in economic activity and a sharp increase in unemployment. Consistent with its statutory mandate to foster maximum employment and stable prices, the Federal Reserve established lending programs during the crisis to address the strains in financial markets, support the flow of credit to American families and firms, and foster economic recovery.
All of the Federal Reserve's lending programs were announced prior to implementation and the amounts of support provided were easily tracked in weekly and quarterly reports on the Federal Reserve Board's website.
The Federal Reserve followed sound risk-management practices under all of its liquidity and credit programs. Credit provided under these programs was fully collateralized to protect the Fed--and ultimately the taxpayer--from loss. As verified by our independent auditors, the Federal Reserve did not incur any losses in connection with its lending programs. In fact, the Federal Reserve has generated very substantial net income since 2007 that has been remitted to the U.S. Treasury.
Most of the Fed's lending facilities were priced at a penalty over normal market rates so that borrowers had economic incentives to exit as market conditions normalized. Lending peaked at $1.5 trillion in December 2008.* All of the emergency support programs established during the crisis were closed to new lending in 2010. Detailed information on the support provided to individual firms under these programs is available on the Federal Reserve Board's website.