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Banks boost borrowing from Fed for second week

Section: Daily Dispatches

By Martin Crutsinger
Associated Press
Thursday, August 30, 2007;_ylt=AlmkO...

WASHINGTON -- Banks increased their borrowing from the Federal Reserve for a second straight week as the central bank worked to deal with a credit crunch that has roiled global financial markets.

The Federal Reserve reported that the daily borrowing averaged $1.315 billion for the week ending Wednesday. That was the highest average borrowing since the attacks of Sept. 11, 2001. The average surpassed last week's average of $1.2 billion, which also had been the highest since the 2001 terrorist attacks.

The data released by the Fed offers a snapshot of how banks are responding to the Fed's encouragement for banks to borrow directly from the central bank through a loan facility know as the discount window.

The discount window is the way the central bank provides direct loans to banks. Fed officials announced Aug. 17 that they were cutting the interest charged for discount window loans by a half-percentage point, marking the most dramatic move they have made so far to deal with a spreading credit crisis.

Fed officials including Timothy Geithner, president of the Federal Reserve Bank of New York, have encouraged banks to use the discount window to borrow directly from the Fed.

Last week, four of the nation's biggest banks -- Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp. and Wachovia Corp. -- announced they had borrowed a total of $2 billion.

Each of the big banks stressed they had substantial liquidity and the ability to borrow money elsewhere. However, their actions were seen as a symbolic move to encourage smaller banks to use the discount window if they need to do so.

Many analysts believe the Fed will soon follow its decision to reduce its discount rate by cutting the far more economically significant federal funds rate.

The Fed's target for the federal funds rate -- the interest banks charge each other -- has been at 5.25 percent for more than a year. A reduction in this rate translates immediately into a cut in commercial banks' prime lending rate, the benchmark for millions of consumer and business loans. The prime rate currently stands at 8.25 percent.

David Jones, chief economist at DMJ Advisors, a Colorado-based consulting firm, said he believed the Fed would end up cutting the discount rate a full percentage point, in four quarter-point moves beginning at the September meeting.

"This credit crisis is deeper and more dangerous to the economy than anybody realizes," Jones said.

Michael Gregory, an economist at BMO Capital Markets, said he believed the Fed might try to cut the discount rate again in an effort to stimulate more borrowing by banks from the Fed directly.

The Fed on Aug. 17 cut the discount rate by a half-point to 5.75 percent. However, that still left the discount rate one-half point higher than the funds rate, which is at 5.25 percent. That means that banks must pay the Fed more for direct loans from the discount window than they have to pay other banks to borrow for them on an overnight basis.

"The Fed has more convincing to do" to get commercial banks to fully utilize the discount borrowing window to help ease the credit crunch, Gregory said.

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