Reply #27: Fed might accept foreign collateral: Kohn

[UpInArms]

http://www.marketwatch.com/news/story/fed-might-accept-foreign-collateral/story.aspx?guid=%7BA2737127%2DB1AD%2D4E18%2D81C6%2D0ED1DF0AEC89%7D

WASHINGTON (MarketWatch) -- The Federal Reserve is actively considering creation of a lending facility that would accept "very safe" foreign collateral from "sound" global banks in case of a widespread liquidity crisis, Fed Vice Chairman Donald Kohn said Thursday.

A new global discount window is "under active study," Kohn said. "It is possible that over time, major central banks could perhaps agree to accept a common pool of very safe collateral, facilitating the liquidity management of global banks," he said, stipulating that such loans only be made to sound institutions.

Kohn's suggestion came in prepared remarks wrapping up a special conference in New York on liquidity in money markets that was sponsored by the New York Fed and the Columbia Business School. Read his prepared remarks

"Market functioning remains far from normal," Kohn said, pointing in particular to large spreads between overnight bank rates such as Libor and other short-term rates. Such large spreads indicate that markets still are in shock.

Kohn argued that the Fed and other central banks had prevented a global run on Bear Stearns and possibly other major financial institutions in March, but the emphasis of his talk was on what lessons central banks and the financial system should take from the liquidity crisis that spread like topsy from subprime mortgages to asset-backed securities to the collapse of one of the world's biggest investment banks. See latest story on Bear Stearns

"One of the things we have learned over recent months is that broker-dealers, like banks, are subject to destructive runs when markets aren't functioning well," Kohn said.

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