Borrowing At Fed's Discount Window Increases

Source : The Straits Times, Sep 14, 2007

WASHINGTON - BANKS increased their borrowing from the Federal Reserve this week, pushing the one-day level to the highest point since the day following the 2001 terrorist attacks.

The Fed reported on Thursday that direct borrowing by commercial banks from the Fed totaled US$7.15 billion (S$10.8 billion) in primary credit on Wednesday.

That was the highest one-day total since the Fed loaned US$45.5 billion on Sept 12, 2001, the day following the terrorist attacks on New York and Washington.

The daily average borrowing from the Fed for the week ending Wednesday totaled US$2.93 billion, an increase of US$1.83 billion from the average for the previous week.

Both figures were higher than had been expected and indicated that the strains from the credit crisis that hit full-force last month were continuing, analysts said.

'This is a much-higher borrowing total than expected and it is probably a sign that the credit crisis, while it may be moderating slightly, is far from over,' said David Jones, head of DMJ Advisors, a Colorado-based economic forecasting firm.

Treasury Secretary Henry Paulson, meeting with executives of the top US mortgage companies on Wednesday, said that it would take some time before the turbulence that hit financial markets last month is resolved, especially as it relates to subprime mortgages.

But, he said, 'we are already seeing some signs of improvements in a number of markets that have been experiencing stress'.

Mr Paulson did not elaborate, but a separate Fed report on Thursday showed that the amount of short-term borrowing by companies in the form of commercial paper fell by a much smaller amount this week than in the previous four weeks.

The discount window is the way the central bank provides direct loans to banks. The Fed on Aug. 17 announced it was cutting the interest it charges banks to make direct loans by a half-percentage point.

It has been the most dramatic move the central bank has made to signal that it was prepared to do what was necessary to contain the fallout from the credit crisis that began with rising delinquencies in subprime mortgages but has now spread to other types of loans.

Mr Jones said he expected the Fed to go further and begin cutting the more economically important federal funds rate next Tuesday at the Fed's regularly scheduled meeting.

A cut in the funds rate, which has been at 5.25 per c ent for a year, would immediately trigger declines in banks' prime lending rate, the benchmark for millions of consumer and business loans. -- AP