Banks cut back on Fed emergency lending programs

Banks cut back on Fed emergency lending programs, sign credit stresses easing

(AP)  WASHINGTON (AP) - Banks cut back on loans from the Federal Reserve's emergency borrowing facility over the past week and trimmed use of other credit programs set up to ease the financial crisis, a sign credit problems are moderating.

The Fed on Thursday said commercial banks averaged $27.4 billion in daily borrowing over the week that ended Wednesday. That was down from $27.9 billion in the week ended Oct. 7.

The identities of the financial institutions are not released. They pay just 0.50 percent in interest for the emergency, overnight loans.

Banks scaled back their use of another program aimed at boosting the availability of short-term financing crucial for paying salaries and supplies. The Fed's net holdings of "commercial paper" averaged $40.8 billion, a drop of $252 million from the previous week. At its peak in late January, the Fed held almost $350 billion of commercial paper.

Banks also trimmed their use of short-term loans drawn from the Fed's "term auction credit" facility. Those loans averaged $155.4 billion, a decrease of nearly $23 billion from the previous week.

The reduced borrowing in the past week shows banks are having a slightly easier time getting short-term loans in private markets.

But bank customers - both businesses and individuals - are still having trouble securing loans. There's been improvements since the financial crisis struck last fall, but the flow of credit is not back to normal. That's one reason Fed Chairman Ben Bernanke and other economists believe the budding economy recovery will be lethargic.

The report also showed that the central bank boosted its purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. Those purchases averaged $702.6 billion over the past week, an increase of $10.3 billion from the previous week.

The Fed at its meeting last month decided to slow down its purchases of these securities. Now, it will wrap up its $1.25 trillion program by the end of March, rather than by the end of this year. The goal of the program is to drive down mortgage rates and prop up the housing market.

Minutes of the Fed's closed-door meeting, released Wednesday, showed that Fed officials were conflicted over the direction of the program. Some said it might need to be increased to support a quicker recovery, while one member thought it might warrant being scaled back.

The Fed's program has been credited with helping to force down mortgage rates.

Rates on 30-year home loans averaged 4.92 percent this week, down from 6.46 percent a year ago, Freddie Mac, the mortgage company reported. The rate was up slightly from 4.87 percent a week earlier.

Getting the housing market back on firmer footing is a key ingredient to a sustainable recovery.