Fed Discount Loans to Commercial Banks Rise to Record

By Scott Lanman

July 24 (Bloomberg) -- The Federal Reserve said lending to commercial banks rose to an average daily record while loans to securities firms showed a zero balance for a fourth week.

Loans to commercial banks through the Fed's traditional discount window increased by $2.47 billion to an average $16.4 billion a day in the week ended yesterday, while lending to Wall Street bond dealers fell to zero from an average $9 million, the Fed reported today.

The subprime-mortgage collapse has taken a toll on banks and other financial companies, which have reported $468 billion of writedowns since the start of 2007. Fed officials have responded to the yearlong credit crisis by narrowing the gap between the discount rate and the benchmark rate and increasing the term of commercial-bank loans to 90 days from overnight.

``It reflects the growing use of the discount window as not just an overnight backstop but as a permanent source of funding,'' said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm. The Fed report shows banks are taking advantage of the lengthened terms, he said.

The average daily total for the discount window surpassed the previous high of $16 billion in the week ended May 28. Commercial banks also have $150 billion in outstanding Fed loans from the central bank's Term Auction Facility, which conducts sales of 28-day funds every two weeks.

The Fed's single-day record for discount-window lending is $45.5 billion on Sept. 12, 2001, the day after the terrorist attacks on the World Trade Center and Pentagon. The reported daily average for that week was $11.7 billion.

Restore Stability

The central bank opened lending to investment banks in March to restore stability to financial markets. New York Fed President Timothy Geithner said today that even with borrowing under the so-called Primary Dealer Credit Facility in decline, the program is still needed as a source of investor confidence.

The loan balance fell to zero after the Fed took on a portfolio of Bear Stearns Cos. assets to ensure the firm's takeover by JPMorgan Chase & Co.

``I don't think you can really judge the value today to the firms themselves, or the people that fund them, from looking at use day-by-day,'' Geithner said at a House Financial Services Committee hearing in Washington.

As of yesterday, there were no loans outstanding in the primary-dealer program for a fourth straight week, while commercial banks had $17.7 billion of discount-window loans, the Fed reported.

Net Value

The central bank said the net value of the former Bear Stearns portfolio was valued at $29.059 billion as of yesterday, compared with $29.019 billion a week ago.

The Fed revalued the underlying assets of the portfolio as of June 30, compared with June 26, and will now assign a new ``fair value'' quarterly, next on Sept. 30. Weekly calculations of the net portfolio value are updated to reflect accrued earnings and expenses.

The Fed loaned $28.8 billion last month to a company it formed to purchase the Bear Stearns investments, which as of mid- March included debt backed by mortgages and other items JPMorgan deemed too risky to take on. JPMorgan is absorbing the first $1.15 billion of any losses realized on the holdings.

The average daily total of loans to dealers reached a record $38.1 billion the week ending April 2.

Fed holdings of U.S. Treasury securities rose by $85 million for a daily average of $479.1 billion. The central bank had about $740 billion of Treasuries at the start of 2008.

Aggressive Policy

Fed policy makers kept the benchmark rate at 2 percent at their last meeting June 25, ending the most aggressive monetary easing in two decades. The discount rate is now 2.25 percent, compared with the three-month London Interbank Offered Rate for the dollar of 2.80 percent.

The Fed reported no net misses in reserve projections. A net miss occurs when the actual reserve level in the banking system diverges from the Fed's projections for a day by $2 billion or more. If the level is outside expectations, the federal funds rate can deviate from target.

The Fed also reported that the M2 money supply rose by $300 million in the week ended July 14. That left M2 growing at an annual rate of 6.2 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 fell by $10.1 billion. Over the past 52 weeks, M1 has increased 0.6 percent. The Fed no longer publishes figures for M3.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.