The Fed lent abroad in such magnitudes because its officials appreciated America’s dependence on Europe’s banks. Collectively, those banks were too big and too important for U.S. financial intermediation to be allowed to fail. In the years before the crisis, European banks borrowed from American money-market funds and provided credit to Americans by buying asset-backed securities.
By the end of 2007, foreign banks had accumulated more than $6.5 trillion in claims on U.S. borrowers, of which $4 trillion could be attributed to banks in France, Germany, Switzerland, and the United Kingdom. Banks in other European countries, particularly Belgium, the Netherlands, and Spain, accounted for another $1 trillion. For perspective, U.S.-chartered commercial banks had extended only $7.5 trillion of credit on the eve of the crisis.