When Even Banks Had to Turn to The Fed to Borrow

The chart below overlays the total borrowings of depository institutions from the Fed, in $bn (source: Fed Bank of St Louis) on the spread between 3-month LIBOR and the 3-month OIS (source: Bloomberg), which is a measure of the cost of lending between banks.

(click to enlarge)

Intuitively, if for a bank the cost of borrowing from another bank becomes too onerous, and if access to capital markets is frozen or too slow, the (only?) alternative is to borrow from the government. The graph makes this relationship obvious: the cost of borrowing, in blue, jumped in September 07. Fortunately the government came to the rescue, and as the pink line shows, it lent up to $450bn.