Fed reduces length of emergency loans

AP News
Posted: Nov 17, 2009 12:58 PM

The Federal Reserve said Tuesday that it will reduce the length of loans banks can draw from its emergency lending program "in light of the continued improvement in financial conditions."

The maximum loan duration will be cut to 28 days, from 90 days, starting on Jan. 14, the Fed said.

During the financial crisis, the Fed had lengthened the maximum maturity of such emergency loans. The move was aimed at breaking through credit clogs and getting banks to lend more freely to businesses and households.

Before the crisis, cash-strapped banks would draw overnight loans from the Fed's emergency loan program, known as the "discount window." They pay just 0.50 percent interest on the loans.

With the economy on the mend, the Fed has moved to scale back some other programs that were set up to deal with the financial crisis. It has trimmed the total amount of loans available to banks. The central bank also has slowed down programs intended to reduce rates on mortgages and on other consumer debt.

Despite prodding from Congress, the Fed does not release the identities of banks that draw loans from its emergency facility. The Fed has argued that doing so could prompt a run on a bank, defeating the purpose of the program.

For years, the Fed has acted as the country's "lender of last resort," meaning banks can turn to the Fed for short-term loans when they can't get the money elsewhere. Banks have to pledge collateral for the Fed loans.

The Fed's objective is to help banks get over any trouble spots so that they can continue to make loans. That's critical to the health of the financial system and to the economy.