No stigma in taking cheap (maybe free) money from Fed

Surge in US Bank Borrowing from Fed

By Krishna Guha
Financial Times, London
Friday, April 4, 2008

http://www.ft.com/cms/s/0/508fcb8e-01d6-11dd-a323-000077b07658.html?ncli...

WASHINGTON -- Bank borrowing from the Federal Reserve's discount window surged in recent days, as primary dealers continued to draw still larger amounts of cash from their new emergency finance facility, figures released by the US central bank showed on Thursday.

The Fed said bank borrowing from the discount window averaged $7 billion in the week to April 2 -- a $6.5 billion jump from the previous week. The total amount outstanding on April 2 was $10.3 billion.

Meanwhile borrowing from the new emergency finance facility for primary dealers -- including investment banks that do not have access to the discount window -- rose $5.2 billion to average $38.1 billion over the week, though the amount outstanding dipped to $34.4 billion on April 2.

Michael Feroli, an economist at JPMorgan Chase, said the discount window borrowing was the highest since data began in 1961, with the exception of the week after the terror attacks of September 11, 2001. But he said this should not be seen as negative for the financial system.

Instead, the increased borrowing by banks appears to reflect the reduction in the penalty rate payable on the discount window, which has made it an increasingly competitive source of funds for financial institutions.

While some of the borrowing may be by institutions that are in desperate need for cash, the increase could also represent an erosion of the "stigma" associated with going to the Fed for funds -- a longstanding objective for policymakers.

In recent months the Fed has ramped up its provision of liquidity in a bid to unfreeze the credit markets, offering longer-term cash loans to banks and providing emergency finance and term loans of securities to investment banks for the first time.

Some of these actions have resulted in shifts in the composition of the US central bank's balance sheet. In particular, its portfolio of Treasury securities has declined from a peak of $791 billion last summer to $581 billion. There has been an increase in loans outstanding to financial institutions.

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