Friday, May 16, 2008

Fed's Direct Loans to Banks Climb to Record Level (Update2)

By Christopher Anstey and Steve Matthews

May 15 (Bloomberg) -- The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week as money-losing lenders increasingly turn to the central bank for funds.

Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington. Separately, the Fed's loans to Wall Street bond dealers rose by $75 million to $16.6 billion.

Policy makers have increased the attractiveness of direct loans as they seek to alleviate the impact of the credit crunch. Fed Chairman Ben S. Bernanke said two days ago that while markets have improved, they remain ``far from normal,'' adding that the central bank is prepared to increase its twice monthly auctions of funds to banks.

``The Fed is providing an extraordinary amount of liquidity through various mechanisms,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. While ``credit markets are showing signs of improvement'' there is ``a long way to go,'' he said.

Fed officials have reduced the cost of direct loans to a quarter-point above the benchmark overnight lending rate between banks. In March, they extended the term of the loans to commercial banks to 90 days. The discount rate is now 2.25 percent, compared with the three-month London Interbank Offered Rate for the dollar of 2.72 percent.

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