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In 2010, small banks turn to Fed for loans

– Small banks based in towns ranging from Munich, N.D., to Cairo, Ga., were among borrowers from the Federal Reserve’s discount window during the third quarter of 2010, the Fed showed in the first release of once-secret loan data as required under the Dodd-Frank Act.

The transactions occurred as the U.S. economy completed a year of growth following the worst recession since the Great Depression.

Unemployment averaged 9.5 percent in the third quarter of 2010, and the Fed was preparing to announce in November a second round of bond-buying known as quantitative easing to spur the recovery and revive the job market.

The release covers the period from July 22, 2010, to Sept. 30, 2010.

The third-quarter 2010 borrowing levels show a steep decline in the discount window’s use after the financial crisis.

Primary credit loans outstanding on Sept. 29, 2010, totaled $99 million, compared with a record $110.7 billion on Oct. 29, 2008, as banks sought cash after the collapse of Lehman Brothers Holdings in September that year.

The discount window is the Fed’s main tool for providing cash to banks that run into temporary funding shortfalls.

The loans are fully collateralized and made by the Fed system’s 12 reserve banks.

The Fed has three categories of loans. Primary credit is for healthy banks with short-term funding needs. Secondary credit is for troubled banks, and seasonal credit is for banks that have uneven funding flows. The Dodd-Frank Act of 2010 required disclosure of discount window loans with a two-year lag.

Primary credit began to decrease rapidly as the Dodd-Frank Act became law on July 21, 2010. Discount window loans to healthy banks fell from $19 billion in the first week of January 2010 to $4.2 billion at the end of May.

On a conference call with reporters in late September, Fed officials said reserve bank officers advised borrowers that the loans would be made public once Dodd-Frank was enacted. The officials spoke on condition they not be identified.

One of the largest borrowers was Gorham Savings Bank, from Gorham, Maine, according to the data. The bank took out a loan of $70 million on Aug. 5, 2010, in the largest single amount during the period. It posted $136 million in collateral that included commercial real estate loans and U.S. Treasury and agency securities.

The Fed said the loan was repaid the next day, and it was listed as “primary credit,” meaning the bank was deemed a well-capitalized and sound institution by the Fed discount window officer.

Dan Hunter, Gorham’s chief financial officer, wasn’t immediately available for comment and other people reached at the bank by phone said they weren’t authorized to comment.

The Federal Reserve has never voluntarily released information on the discount window out of concern that disclosure would keep banks away from the facility, which has been associated with the stigma of weak institutions.