Banks Step Up Borrowing From the Fed

Banks have stepped up their borrowing from the Federal Reserve, a development encouraged by central bank policymakers to help stem a credit crunch that has roiled Wall Street.

The Federal Reserve, in a report released Thursday, said the weekly average of borrowing -- for the seven days ending Wednesday -- was $1.2 billion. That was the third-highest weekly average since at least the Sept. 11, 2001, terror attacks, the Fed said.

On just Wednesday alone, $2 billion was borrowed. That was the most in a single day since April 12, 2006, the Fed said.

There was heightened interest in Thursday's report because it offered the best picture thus far on the extent to which banks were using the "discount window" after the Fed's announcement last week that it was cutting rates to banks for these loans.

The Fed's unusual move last Friday to slice the discount rate -- its rate on loans on so-called primary credit -- by one-half percentage point to 5.75%, has marked the central bank's most aggressive action to date to alleviate the credit crisis.

Timothy Geithner, president of the Federal Reserve Bank of New York, and other Fed officials have been urging banks to borrow from the Fed's discount window. They have been trying to remove a negative perception that it is a place for banks to turn only as a last resort. Fed officials have suggested that the use of the discount window would be viewed as a sign of strength, rather than weakness.

Besides lowering the rate on these loans, the Fed is now allowing loans of up to 30 days versus the normal one day. The Fed also is letting banks put up a wide range of collateral to back the loans.

So far the Fed's response to the market turbulence has been narrowly tailored -- aimed at helping financial institutions get through the stress and restoring confidence on Wall Street.

The country's four biggest banks on Wednesday said they borrowed a total of $2 billion from the Fed's discount window. The four banks that went public with their moves were Citigroup, JPMorgan Chase , Bank of America and Wachovia .

At the time, each bank stressed it had "substantial liquidity" and the ability to borrow money elsewhere. It was viewed as a symbolic gesture and a way of encouraging use of the discount window by other banks.

The central bank has been reluctant to use its most potent weapon -- a cut in the federal funds rate. This important interest rate has stood at 5.25% for more than a year. It's the interest banks charge each other on overnight loans and is the central bank's main lever to influence economic activity. A cut in the funds rate would cause commercial banks to lower their prime lending rate charged to millions of people and businesses.

The odds, though, are growing that the Fed will cut the funds rate on or before Sept. 18, its next regularly scheduled meeting, analysts say. The Fed hasn't lowered the funds rate in four years.

Fed officials will be watching closely for any signs of whether the credit problems, financial turbulence and the worsening housing slump are seriously crimping spending and investment by people and businesses, key ingredients for healthy overall economic activity.

Any decision to change the federal funds rate must be driven by these and other economic considerations, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said on Tuesday.