Banks trim borrowing from emergency Fed program
WASHINGTON — Banks reduced their borrowing from a Federal Reserve emergency lending program for the third straight week, a sign the institutions are having an easier time getting credit from private markets.
The Fed said Thursday that commercial banks averaged $30 billion in daily borrowing over the week that ended Wednesday. That’s down from $30.7 billion in the week ended Aug. 19.
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 worsened the current recession, the deepest since World War II.
The identities of the financial institutions that receive the emergency loans are not released. They pay just 0.50 percent in interest for the emergency loans.
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 that doing so 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 increased its holdings of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae to $624.3 billion, from $607 billion the previous week. The goal of the purchases, which began Jan. 5, is to drive down mortgage rates.
The Fed has pledged to purchase up to $1.25 trillion of the securities, along with $200 billion of debt issued by Fannie and Freddie.
Mortgage rates edged up this week. Rates on 30-year home loans averaged 5.14 percent, up from 5.12 percent last week, Freddie Mac reported Thursday. That’s above a record low of 4.78 percent in the spring.
On Thursday, Richmond Federal Reserve Bank President Jeffrey Lacker said the central bank may not need to buy the full amount if the economy grows at a healthy pace soon. He said the program should be re-evaluated in the coming months
The weekly lending report also showed the Fed’s net holdings of “commercial paper” averaged $52.1 billion, a drop of $4.4 billion from the previous week. That’s an encouraging sign that investors’ appetite for such help from the Fed has eased.
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.
Critics worry the Fed’s actions have put billions of taxpayers’ dollars at risk. Some of 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 $39.3 billion for the week ending Wednesday, up slightly from $39.2 billion last week.
Now that the economy is showing signs of life, Fed policymakers must decide how and when to withdraw the hundreds of billions of dollars 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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Associated Press writer Sue Lindsey in Danville, Va., contributed to this report.
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