Banks borrow less from Fed emergency loan program

Banks have trimmed their borrowing from the Federal Reserve’s emergency lending program, an encouraging sign that some credit stresses are abating.

The Fed on Thursday said commercial banks averaged $36.2 billion in daily borrowing over the week that ended Wednesday. That was down from $36.9 billion in the week ending June 10.

Investment firms didn’t draw any loans for the fifth straight week. The last time they drew any money ? just $482 million ? was in the week that ended May 13.

The identities of the financial institutions are not released. They pay just 0.50 percent in interest for the emergency loans.

In another promising sign, the report showed the Fed’s net holdings of “commercial paper” averaged $136 billion over the week that ended Wednesday, a decrease of $4.8 billion from the previous week.

Commercial paper is the crucial short-term debt that companies use to pay everyday expenses, which the Fed began buying under the first-of-its-kind program on Oct. 27, a time of intensified credit problems. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

The report also showed that the Fed stepped up its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. They averaged $455.3 billion over the past week, up $27.9 billion from the previous week. The goal of the program, which started on Jan. 5, is to drive down mortgage rates and help the housing market.

Mortgage rates fell this week, after rising for the past several weeks.

Rates on 30-year home loans fell to 5.38 percent, from a seven-month high of 5.59 percent last week, Freddie Mac reported Thursday.

Some economists had worried that a recent run-up in rates on mortgages and Treasury securities ? if prolonged ? could choke off prospects for an economic recovery. Although there’s a chance the Fed could boost its purchases of government debt at its meeting next week, most analysts doubt that will happen. The Fed in March announced it would buy up to $300 billion worth of Treasury securities over the next six months with the hope of pulling down rates on mortgages and other consumer debt.

Squeezed banks and investment firms have been borrowing from the Fed because they couldn’t get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding much of their cash, rather than lending it to each other or customers. The lockup in lending has contributed to the longest recession since World War II.

Investment houses in March 2008 were given similar emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation’s fifth-largest investment bank to the brink of bankruptcy and into a takeover by JPMorgan Chase & Co.

Critics worry the Fed’s actions have put billions of taxpayers’ dollars at risk. Bolstering those concerns, the assets the Fed took on last year when it bailed out Bear Stearns and insurer American International Group Inc. have dipped in value.

The report also said that credit provided to AIG averaged $42.9 billion for the week ending Wednesday, down slightly from the previous week.

The central bank’s balance sheet stands at $2.055 trillion, up from last week. The balance sheet has more than doubled since September, reflecting the Fed’s many unconventional efforts ? various programs to lend or buy debt ? to mend the financial system and lift the country out of recession.

Copyright 2009 The Associated Press.