Fed Mulls Overhaul of Overnight Lending

May create new entity to replace loan clearing banks
By Matt Cantor,  Newser Staff
Posted Jun 22, 2009 1:15 PM CDT
Fed Mulls Overhaul of Overnight Lending
In this Oct. 15, 2008 file photo, the exterior of JPMorgan Chase offices in San Francisco are shown.    (AP Photo/Paul Sakuma, File)

The Fed is planning an overhaul of the repurchase markets involved in banks’ overnight trading—including the creation of a new unit to oversee transactions, the Financial Times reports. Such a facility would take the place of clearing banks, such as JPMorgan Chase, that currently act as middlemen for loans, assessing collateral and advancing cash. Fed officials think the system may have played a role in the Lehman downfall.

In a crisis, officials worry, the current system puts clearing banks in a tight spot, forced to call for collateral that could put rivals at risk. The goal would be "to remove conflicts of interest of the clearing banks and the investment banks so that the investment banks aren’t vulnerable to a sudden restriction of credit,” says an insider. The Fed aims to have the new system running by the fall.
(More financial crisis stories.)

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