Thursday, July 31, 2008

Banks Borrow Record Amount From Fed

Banks borrowed a record amount of funds from the Federal Reserve in the latest week as the commercial paper market continued to contract.

Banks' primary credit borrowings averaged $17.45 billion per day in the latest week, the second straight week this had hit a record and up from $16.38 billion the previous week, Fed data showed on today.

It is difficult to attribute the reasons behind the increase in primary credit borrowings from the Fed. Some may be from banks having difficulty finding alternative funding, and others may be borrowing to take advantage of the low borrowing rate of 2.5%.

On the other hand, secondary credit extended by the Fed, which is usually taken out by banks in need of emergency cash, rose to $89 million in the latest week, from $34 million the week before. Although these numbers are very small compared with primary credit, it means that there's an increasing number of banks that the Fed is classifying as 'unsound' or inadequately capitalized.

The U.S. commercial paper market, fell $16.0 billion to $1.728 trillion, the lowest level outstanding in two years. Part of the overall decline was attributable to asset-backed commercial paper, a subsector that has been eroded by the slide of housing and mortgage-related securities. U.S. asset-backed commercial paper outstanding fell by $6.1 billion.

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