Banks reduce borrowing from Fed’s emergency lending program

image Banks trimmed their borrowing over the past week from the Federal Reserve’s emergency lending facility and cut back on other programs intended to ease the financial crisis, adding to evidence that credit markets are thawing.

In a weekly report issued Thursday, the Fed said banks averaged $30.4 billion in daily borrowing over the week ended Wednesday. That was down from $32.7 billion in the week ending Sept. 3.

The identities of the financial institutions are not released. They pay just 0.50% in interest for the emergency loans, overnight loans.

There also was less use of another program aimed at increasing the availability of short-term financing crucial for paying salaries and supplies. The Fed’s net holding of "commercial" paper averaged $47.1 billion, a decrease of $1 billion from the previous week.

Demand was flat for another program that offers banks longer-term loans to overcome credit humps. Roughly $212 billion in loans was made available over the past week, unchanged from the previous week.

The Fed also stepped up purchases of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. They averaged $625.3 billion over the past week, up $886 million from the previous week. The goal of the program is to drive down more rates.
Rates on 30-year home loans dipped this week. They averaged 5.07%, down from 5.08% last week, Freddie Mac reported Thursday.

Squeezed banks borrow from the Fed when they have trouble getting the money elsewhere. At the height of the financial crisis last fall, investors cut banks off and shifted money into safer Treasury securities. Financial institutions hoarded much of their cash, rather than lending it to each other or customers. That lockup in lending contributed to the U.S. suffering its worst recession since the 1930s.

Critics worry that the Fed’s bailouts of Bear Stearns and American International Group last year put billions of taxpayers dollars at risk and will encourage companies to take make reckless gambles in the future on the belief the government will clean up their messes. JPMorgan Chase took over Bear Stearns in a deal backed by the Fed.

Donald Kohn, vice chairman of the Fed, defended the central bank’s rescue efforts in a speech Thursday. "Apart from a very small number of exceptions involving systemically important institutions …. the overall credit risk involved in our lending during the crisis has been small," he said.

Kohn also predicted the Fed will "continue to earn substantial net income over the next few years under all but the most remote contingencies."

The Fed has earned $16.4 billion in the first six months of this year, even after accounting for a nearly $5 billion drop in the market value of assets it took over when it bailed out Bear Stears and AIG last year.

The Fed’ report showed that credit provided to AIG averaged $38.9 billion for the week ending Wednesday, up slightly from the previous week.

The Fed’s balance sheet now stands at $2.1 trillion, more than double the level from before the financial crisis struck. The ballooning balance sheet reflects the central bank’s many unconventional lending programs to mend the financial system and pave the way for a lasting economic recovery.

Source: USA Today

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