Banks Cut Borrowing from Fed Emergency Program
July 23, 2009 - 4:10 PMBanks trimmed borrowing from the Federal Reserve's emergency lending facility over the past week and cut back on other programs designed to ease the financial crisis, a sign that some credit problems are easing.
The Fed said Thursday that commercial banks averaged $33.7 billion in daily borrowing over the week that ended Wednesday. That was down from $34.5 billion in the week ended July 15.
The identities of the financial institutions are not released. They pay just 0.50 percent in interest for the emergency loans.
The weekly lending report also showed the Fed's net holdings of "commercial paper" averaged $110 billion, a decrease of $1.9 billion from the previous week.
Commercial paper is the crucial short-term debt that companies use to pay everyday expenses, which the Fed began buying under the first-of-its-kind program on Oct. 27, a time of intensified credit problems. The central bank has said about $1.3 trillion worth of commercial paper would qualify.
The report also showed the Fed ramped up its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. They averaged $537 billion over the past week, up $48.3 billion from the previous week. The goal of the program, which started on Jan. 5, is to drive down mortgage rates and help the housing market.
Mortgage rates, however, nudged up this week, after falling for three straight weeks.
Rates on 30-year home loans averaged 5.2 percent, up from 5.14 percent last week, Freddie Mac reported Thursday.
Still, the housing market showed signs of life in June as sales of previously occupied homes rose for the third straight month, the National Association of Realtors said Thursday. That helped push the Dow Jones industrials above 9,000 for the first time since early January.
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 has contributed to the longest recession since World War II.
Investment houses in March 2008 were given similar emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation's fifth-largest investment bank to the brink of bankruptcy and into a takeover by JPMorgan Chase & Co.
But investment firms didn't draw any loans form the Fed for the 10th straight week. The last time they drew any money - just $482 million - was in the week that ended May 13.
Critics worry the Fed's actions have put billions of taxpayers' dollars at risk. Bolstering those concerns, the assets the Fed took on last year when it bailed out Bear Stearns and insurer American International Group Inc. have dipped in value.
The report also said that credit provided to AIG averaged $43 billion for the week ending Wednesday, about the same as last week.
The central bank's balance sheet stands at $2.01 trillion, down slightly from last week. The balance sheet has more than doubled since September, reflecting the Fed's many unconventional efforts - various programs to lend or buy debt - to mend the financial system and lift the country out of recession.
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