Banks cut use of Fed emergency lending programs

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Associated Press

Posted on October 8, 2009 at 3:05 PM

Updated Thursday, Oct 8 at 3:41 PM

WASHINGTON (AP) — Banks reduced their borrowing from the Federal Reserve's emergency lending facility over the past week, and cut back their use of other programs designed to ease the financial crisis.

The Fed said Thursday that banks averaged $27.9 billion in daily borrowing over the week ended Wednesday, down slightly from $28 billion in the week ended Sept. 30. That's also down from $75 billion a year ago, when the financial crisis was raging after the collapse of Lehman Brothers in September 2008.

The central bank has pumped trillions of dollars into the financial system through an array of short-term lending programs in an effort to ease the crisis. The reduced borrowing in the past week shows banks are having a slightly easier time getting short-term loans in private markets.

The identities of the financial institutions that receive emergency loans are not released. They pay just 0.50 percent in interest for the loans.

Banks also made 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 about $41 billion, a drop of almost $900 million 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, as the financial crisis intensified. At its peak in late January, the Fed held almost $350 billion of commercial paper.

Many lawmakers and nonprofit groups have criticized the Fed for not identifying the banks that benefit from its cheap loans. But Fed Chairman Ben Bernanke has argued doing that could cause a run on the institutions and would undermine the purpose of the programs, which is to bolster financial stability.

The central bank did ramp up its activity in other areas. It slightly increased its holdings of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae by $85 million to $692.3 billion.

The Fed also added $3.4 billion of debt issued by Fannie and Freddie, bringing the total on its balance sheet to $133.4 billion.

The central bank has pledged to purchase up to $1.25 trillion of the mortgage-backed securities and $200 billion of debt issued by Fannie and Freddie.

The goal of the purchases, which began Jan. 5, is to drive down mortgage rates.

Mortgage rates were below 5 percent this week for the second straight week, Freddie Mac said Thursday. The average rate on a 30-year fixed mortgage was 4.87 percent, down from 4.94 percent last week.

Last year at this time, the 30-year fixed-rate mortgage averaged 5.94 percent. Low rates make home buying or refinancing more attractive for consumers.

Bernanke and his Fed colleagues said last month that they will slow their purchases of mortgage-related debt and extend the program through the first three months of 2010. In August, the Fed signaled that it would wind down a $300 billion government debt-buying program aimed at lowering rates on all kinds of consumer debt.

Those moves reflect the challenge facing Fed policymakers: with the economy is showing signs of life, they must decide how and when to withdraw the huge amount of money they've pumped into the economy. Some analysts think it could take four or five years for the Fed to pull back entirely and shrink a balance sheet that is now about $2.1 trillion, more than double what it was when the financial crisis struck.

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