Tags: US | Fed | Emergency | Lending

Banks Once Again Cut Emergency Borrowing From Fed

Friday, 09 Apr 2010 12:37 PM

Banks borrowed less from the Federal Reserve's emergency lending program over the past week, providing further evidence that credit problems are easing.

The Fed says that banks averaged $7.21 billion in daily borrowing for the week that ended Wednesday. That was down from $7.66 billion in average borrowing for the previous week.

Banks have been reducing their use of the Fed's emergency discount loan window as financial conditions have improved. At the peak of the financial crisis in the fall of 2008, daily borrowing from the discount window peaked at $110 billion as banks found their normal sources of credit frozen.

With financial and economic conditions improving, the Fed has been dismantling various special lending programs set up during the crisis.

Last week, the Fed ended on schedule a $1.25 trillion program to purchase mortgage backed securities held by Fannie Mae and Freddie Mac. While it will not purchase new securities, it plans to hold the securities it owns on its books and Federal Reserve Chairman Ben Bernanke has pledged that the reductions in holdings will be done in a gradual manner.

However, some economists are still worried that the halting of the Fed purchase program for mortgage securities could send interest rates higher at a time when the housing industry is still struggling to emerge from the steepest slump in decades.

Freddie Mac reported in its weekly mortgage survey that 30-year fixed-rate mortgages rose to 5.21 percent this week, up from 5.08 per cent last week. That was the highest level in eight weeks with the increase attributed to an improving economy and the end of the Fed's mortgage security purchases.

The various changes left the Fed's balance sheet at $2.31 trillion for the week ending Wednesday, nearly triple the level of the Fed's holdings before the financial crisis began in the summer of 2007.

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