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Fed Says Commercial-Bank Loans Rise To Record $19.8 Billion

Thursday, 11 September, 2008

The Federal Reserve said lending to commercial banks increased to the sixth record in eight weeks, while loans in an emergency program for securities firms showed a zero balance for the 11th straight week.

The Fed report, based on data through yesterday, indicates that Lehman Brothers Holdings Inc. didn't tap the so-called Primary Dealer Credit Facility, an emergency source of credit created after Bear Stearns Cos. collapsed.

Lending to commercial banks through the traditional discount window raised $820 million to a daily average of $19.8 billion. As of yesterday, commercial banks had $23.5 billion of discount-window loans outstanding, the Fed reported.

Fed officials have responded to the yearlong credit crisis by narrowing the gap between the discount rate and the benchmark rate, increasing the term of commercial-bank loans to 90 days from overnight and offering overnight cash loans to bond dealers including Lehman. The discount rate is now at 2.25 percent, a quarter-point higher than the federal funds rate.

Lehman has plunged 74 percent this week in New York trading on concern about its capital, and the company entered into talks with potential buyers, people with knowledge of the situation said today. The Fed program is available for Lehman to use for funding while officials, regulators and executives seek alternative sources of cash, Fed watchers said this week.

`Fragile Circumstances'

The PDCF showed during two weeks in July average daily loans of $9 million and $3 million. That month the central bank extended the PDCF through Jan. 30 because of ``continued fragile circumstances in financial markets.'' It was originally set to end as soon as this month.

The three-month London Interbank Offered Rate in dollars was 2.819 percent today.

In March, the Fed agreed to lend $29 billion to secure Bear Stearns' takeover by JPMorgan Chase & Co.

For the central bank, the Bear Stearns and PDCF lending marked the first extension of credit to no banks since the Great Depression, using emergency authority to act in ``unusual and exigent circumstances.''

The PDCF offers the 19 primary dealers that trade Treasuries with the New York Fed access to direct loans at the same 2.25 percent rate as commercial banks. Dealers can submit collateral including Treasuries and asset-backed debt, corporate bonds and municipal bonds with investment grades.

Bank Write downs

The sub prime-mortgage collapse has taken a toll on banks and other financial companies, which have reported $510 billion of write downs since the start of 2007.

Yesterday, New York-based Lehman reported a $3.9 billion third-quarter loss, the largest in its 158-year history, and said it plans to spin off commercial real-estate holdings and cut its dividend.

The Fed's single-day record for discount-window lending is $45.5 billion on Sept. 12, 2001, the day after the terrorist attacks on the World Trade Center and the Pentagon. The reported daily average for that week was $11.7 billion.

Fed holdings of U.S. Treasury securities raised $61 million to a daily average of $479.8 billion. The central bank had about $740 billion of Treasuries at the start of 2008.

Fed policy makers kept the benchmark rate at 2 percent at their last meeting Aug. 5, and investors expect the same outcome when officials next meet Sept. 16.

The Fed reported no net misses in reserve projections. A net miss occurs when the actual reserve level in the banking system diverges from the Fed's projections for a day by $2 billion or more. If the level is outside expectations, the federal funds rate can deviate from target.

Money Supply

The Fed also reported that the M2 money supply fell by $5.5 billion in the week ended Sept. 1. That left M2 growing at an annual rate of 5.9 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 rose by $13.9 billion. Over the past 52 weeks, M1 increased 1.8 percent. The Fed no longer publishes figures for M3.

Source : http://www.bloomberg.com/