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Systemic risk in the banking system is a phrase that has gained renewed prominence in literature, particularly  in recent weeks. With banks and investment firms continuing to experience widespread reduction in credit availability, providing further evidence of the credit markets squeezing the system, at this point there is virtually nowhere else where banks or firms can get short term funding except the central bank.

According to DJNewswires, with interbank lending markets barely functioning and commercial paper markets nearly paralyzed, a Federal Reserve report released Thursday showed record borrowing at the discount window. Depository institutions and primary dealers, combined, averaged $367.80 billion per day in the week of October 1, nearly double the previous record daily average of $187.75 billion last week. Total borrowing increased by more than 50% to $409.52 billion Wednesday from $262.34 billion in the prior week.

In addition, lending through the primary credit facility, used by commercial banks, also set a record by averaging $44.46 billion per day in the latest week, versus $39.36 billion the previous week.

The Fed’s primary dealer credit facility and other broker-dealers' credit borrowings were $146.57 billion as of Oct 1, after hitting $105.66 billion on September 24. Average daily borrowing through that facility also rose to $147.69 billion from $88.15 billion in the previous week. The figures include loans made to broker-dealers Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Merrill Lynch (MER) as well as their U.K. counterparts.

The Fed also said loans in the ‘other credit extensions’ category, including loans to troubled insurer AIG (NYSE:AIG), totaled $61.28 billion as of October 1, versus $44.57 billion on September 24, while lending via the asset-backed commercial paper money market mutual fund liquidity facility spiked to $152.1 billion as of October 1, from $72.67 billion on September 24.

The reports also showed the Federal Reserve’s holdings of Treasury securities expanded slightly to $476.62 billion as of Oct. 1. A year ago, the Fed’s balance sheet showed it held nearly $800 billion in Treasury securities.

The report came as lawmakers battled the worst financial system crisis in decades, and as the White House, the Treasury Department and the Federal Reserve continued to press for quick action by Congress on the $700 billion plan to buy toxic assets from banks and other institutions to shore up the financial industry.

Source: Record Borrowing from the Fed Discount Window