Friday, August 24, 2007

The Last Week at the Discount Window

The excerpts below from a WSJ article on the discount window give a few more details about the extent of the borrowing at the Fed’s Discount Window.

Loans made from the Federal Reserve's little-used discount window shot up after the Fed eased borrowing terms and invited banks to borrow last Friday, though a sizable chunk was soon repaid, new data from the Fed show.

As of Wednesday, the only significant discount loans outstanding appeared to be the $2 billion in total announced with fanfare by the nation's four largest banks that day, according to weekly discount-window data released yesterday.

The data suggest that the Fed has had some initial success in getting banks to help in calming credit conditions, but whether that cooperation will continue or grow is an open question. Officials have played down the significance of the numbers, arguing that the very availability of the discount window should be a confidence booster, whether or not banks patronize it.

Analysts were divided on the significance of the data. "From the standpoint of trying to get some real liquidity into the using the discount window, that part of the operation did not succeed," said Dave Greenlaw, economist at Morgan Stanley. The only institutions that borrowed, he noted, were the ones that borrowed after being encouraged to do so by the Fed. "That's real disappointing."

However, Lou Crandall, chief economist at Wrightson-ICAP LLC, took the opposite view. "The question is whether the knowledge that the discount window is available in the event of an unexpected liquidity need made a material difference in whether banks decided" to do more lending in the credit markets. While that will never be known, he noted that most markets started to improve soon after the Fed announced the easier borrowing conditions Friday, and those improvements have continued, though gradually.

On Friday, the Fed lowered the rate on discount-window loans to 5.75% from 6.25%, and lengthened the term of those loans to as much as 30 days from one day. In a conference call, the Fed also told bankers that taking loans from the discount window would be viewed as a sign of their strength, not weakness. Such loans have traditionally carried a stigma because they were usually a last resort for struggling banks. . . . .

. . . . . All five banks said they borrowed even though they had access to ample funds at lower cost elsewhere. Most said they did so to show "leadership" and encourage other banks to answer the Fed's call.

Fed officials acknowledge the banks don't need the money but hope they will lend it to creditworthy customers facing constrained financing conditions, helping restore normal trading conditions to now-sluggish debt markets. They also argue it could take some time for banks and their customers to figure out how best to exploit the window.

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