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Banks Borrow Record Amount From Fed

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The Associated Press

Published: October 24, 2008

WASHINGTON - Banks borrowed in record amounts from the Federal Reserve's emergency lending facility over the past week, but investment banks drew loans at a slightly lower, but still brisk, pace.

Thursday's Fed report says commercial banks averaged a record $105.8 billion in daily borrowing over the past week. That surpassed the old record, a daily average of $99.7 billion, from the prior week.

For the week that ended Wednesday, investment firms drew $111.3 billion. That was down from $131 billion in the previous week. This category was broadened last week to include any loans that were made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.

The report also showed that over the past week $114.2 billion worth of loans were made to money-market mutual funds, via banks, to help the funds, which have been under pressure as skittish investors demand withdrawals.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off, moving their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers. The lockup in lending has contributed to a sharp slowing in the economy.

The report also showed the Fed has lent $90.3 billion to insurance giant American International Group. In mid-September, the Fed said it would provide the troubled company a two-year, $85 billion loan.

The central bank also recently said it would lend the company an additional $37.8 billion.

The report comes as Washington policymakers battle the worst financial crisis since the stock market crash of 1929.

So far this year, 15 banks have failed, compared with three last year.

Last week the Bush administration announced it would inject up to $250 billion in banks in return for partial ownership stakes.

The government hopes that banks will use the capital infusions to rebuild their reserves and bolster lending to customers.

Investment houses in March were given similar, emergency-loan privileges as commercial banks after a run on Bear Stearns pushed the investment bank to the brink of bankruptcy.

The identities of commercial banks and investment houses that borrow are not released.

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