Banks Borrow $7.2 Billion From Fed

by: Roy Mehta

US banks had borrowed $7.2 billion from the Federal Reserve as of Wednesday, the most since right after the 9-11 tragedy. The data show the NY Fed was owed $4.9B, the Cleveland Fed $1.6B, and the Richmond Fed $550M, but the names of the banks were not detailed. Banks usually borrow from other banks at the federal funds rate, which has averaged 5.01% this month. The banks that borrowed money from the Fed had to pay 5.75% (the discount rate). According to Lou Crandall, chief economist for Wrightson ICAP, the Fed was "deliberately stingy" ahead of the expiration of the reserve maintenance period, the time when banks must show they have enough cash on reserve against their capital. The Fed created a situation where the federal funds rate, at 6.5% on Monday, 6.0% on Tuesday, and 6.25% on Wednesday, was higher than the 5.75% discount rate. The reasoning behind the Fed's actions is because until this week, it had little success encouraging banks to borrow from them to increase liquidity and ease the credit crunch. There is a stigma associated with borrowing from the discount window; historically, it is done only in extraordinary situations. By forcing banks to borrow, this might diffuse the stigma. The Fed also lowered the discount rate last month half a point with the same idea of getting banks to borrow from them (full story). "If the carrot won't work, use the stick," Crandall said. The Fed's last tactic was more than effective.

Sources: MarketWatch
Commentary: Economists Up the Odds of a Recession -WSJBernanke Mum on Possible Rate CutMajor U.S. Banks Step Up to Discount Window

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