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Banks' Fed Borrowing Rises to Highest Level Ever

AP
Friday, 25 Jul 2008 | 3:09 AM ET

Banks stepped up their borrowing over the past week from the Federal Reserve's emergency lending program, while Wall Street firms didn't draw such loans.

A Fed report released Thursday said commercial banks averaged $16.4 billion in daily borrowing over the past week.

That was up from $13.9 billion in the previous week.

Investment houses were given similar loan privileges as commercial banks after a run on Bear Stearns pushed the nation's fifth-largest investment bank to the brink of bankruptcy.

The situation raised fears that other Wall Street firms might be in jeopardy.

Bear Stearns was eventually taken over by JPMorgan Chase in a deal that involved the Fed's financial backing.

Focusing on the Financials
A look at the financials that were hit hard yesterday, with CNBC's Charlie Gasparino

For the week ending July 23, Wall Street firms didn't borrow from the Fed's emergency facility, the report showed. (What's the word on the Street about financials? See video)

It marked the second time since the Fed opened its emergency program to investment firms on March 17 that they didn't draw such loans.

In the prior week, firms averaged just $9 million in daily borrowing.

Such borrowing rose as high as $38.1 billion in early April.

The identities of commercial banks and investment houses are not released.

Commercial banks and investment companies now pay 2.25 percent in interest for the loans.

In the broadest use of the central bank's lending power since the 1930s, the Fed in March scrambled to avert a market meltdown by giving investment houses a place to go for emergency overnight loans.

Chairman Ben Bernanke said the Fed is considering extending those loan privileges -- which currently are supposed to last only through mid-September -- into next year.

Trying to stem eroding investor confidence, the Fed earlier this month said mortgage giants Fannie Mae and Freddie Mac could draw emergency loans from the central bank if they needed.

There was no indication in the weekly report that they had done so.

Shares of the mortgage giants were clobbered last week as investors grew worried about the companies' financial shape.

Separately, as part of efforts to relieve credit strains, the Fed auctioned nearly $25 billion in Treasury securities to investment companies Thursday.

Firms had placed bids requesting $51.7 billion worth of the super-safe Treasury securities.

In exchange for the 28-day loans of Treasury securities, bidding companies can put up as collateral more risky investments.

These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.

The auction program, which began March 27, is intended to make investment companies more inclined to lend to each other.

A second goal is providing relief to the distressed market for mortgage-linked securities and for student loans.

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