Banks cut emergency borrowing from Fed

Federal Reserve Banks borrowed less from the Federal Reserve’s emergency lending program over the past week, providing fresh evidence that credit markets are improving.

The Fed said that banks averaged $5.99 billion in daily borrowing for the week that ended Wednesday. That’s down from $6.2 billion in average borrowing the previous week.

Loans from the central bank’s emergency lending program, known as the discount window, surged to a high of $110 billion a day during the height of the financial crisis in the fall of 2008 when banks found their customary sources of credit frozen.

The Fed’s new report showed that assets the central bank took on when it bailed out insurer American International Group Inc. and Bear Stearns in 2008 have increased in value as economic and financial conditions have improved.

The Fed’s holdings of residential mortgage-backed securities from AIG were valued at $16.1 billion as of the end of March. That was up from $15.5 billion as of the end of December.

Under its regular quarterly update, the Fed valued its holdings of AIG’s collateralized debt obligations, which are complex financial instruments that combine various slices of debt, at $23.6 billion at the end of March, up from $22.4 billion in December.

The Fed’s holdings of assets from Bear Stearns were valued at $28.2 billion, up from $27.2 billion. The Fed took over some Bear Stearns assets in 2008 when the Wall Street firm was taken over by JPMorgan Chase.

The report also showed that one of the Fed’s emergency programs aimed at dealing with the financial crisis had generated a profit of $4.9 billion. The program sought to revive a crucial short-term funding mechanism called commercial paper that companies use to pay for salaries and supplies.

As the commercial paper market revived, use of the Fed’s support program has now dropped to zero.

The program “succeeded in its objective of restoring liquidity in the short term commercial paper market, thereby supporting the flow of credit to the U.S. economy to the benefit of both businesses and households,” a spokesman for the New York Fed said.

With financial and economic conditions improving, the Fed has been winding down its special lending programs.

The largest of these efforts was a $1.25 trillion program to purchase mortgage-backed securities issued by Fannie Mae and Freddie Mac in an effort to lower mortgage rates and provide a boost to the depressed housing market. The Fed halted new purchases of mortgage-backed securities at the end of last month.

The Fed’s program helped to drive 30-year mortgages to a record low of 4.7 percent in December. Rates have moved up slightly since that time. Freddie Mac reported Thursday that 30-year mortgages averaged 5.06 percent this week, compared to 5.07 percent last week.

AP Economics Writer Jeannine Aversa contributed to this report.

Source: The Associated Press.