Banks borrow slightly less from Fed over past week

AP News
Posted: Dec 03, 2009 5:03 PM

Banks borrowed slightly less from the Federal Reserve's emergency lending program over the past week.

Banks' use of the program has been declining for the last several months, reflecting more stability in the financial system. Banks borrow from the Fed when they are having trouble getting loans in the private market.

The Fed said Thursday that commercial banks averaged $19.8 billion in daily borrowing over the week that ended Wednesday. That's $114 million less than the previous week, and $70.5 billion below the borrowing that took place a year ago at the peak of the credit crisis.

The identities of the banks aren't released. They pay just 0.50 percent interest for the emergency, overnight loans.

Several senators strongly criticized Federal Reserve Chairman Ben Bernanke during a hearing Thursday for pumping billions of dollars into the financial system and rescuing insurance giant American International Group Inc. during the credit crisis.

Bernanke has been nominated for a second, four-year term. Despite the criticism, the Senate is expected to approve the nomination.

Bernanke defended the central bank's extraordinary steps and said the Fed will be able to remove the emergency funds it has injected into the economy once the recovery is firmly rooted. Critics fear the extra money could spur inflation.

The Fed, meanwhile, reported Thursday that it now holds stakes worth $25 billion in two AIG subsidiaries. The ownership stakes were provided in return for reducing AIG's government debt by the same amount. The company still owes the government more than $60 billion in loans.

The central bank also reported a tiny drop of $1 million in the use of a program intended to boost the availability of short-term financing that businesses use for crucial operations like payroll and supplies. Loss of so-called commercial paper financing was a central part of last year's financial crisis.

The Fed's holdings of commercial paper averaged $15 billion for the week ending on Wednesday. At its peak in late January, the Fed held almost $350 billion worth of commercial paper.

Despite banks reducing their use of emergency programs, credit is not flowing freely to businesses and individuals. That's one factor often cited by economists who believe the recovery from the recession, the worst downturn since 1930, will be slow and halting.

The new Fed report also showed that the value of the central bank's purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac dropped last week. Those holdings were valued at an average of $852.2 billion, down $2.7 billion from the previous week.

The Fed in September said it planned to close in March its effort to buy $1.25 trillion of the securities, extending a program that had been scheduled to conclude by the end of this year. The goal of the program is to drive down mortgage rates and prop up the housing markets.

Rates on 30-year home loans fell this week to nationwide average of 4.71 percent, the lowest on records dating to 1971, according to Freddie Mac.