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February 17, 2010 > Banks trim borrowing from emergency Fed loans

Banks trim borrowing from emergency Fed loans

By Jeannine Aversa, AP Economics Writer

WASHINGTON (AP), Feb 11 - Banks trimmed borrowing from the Federal Reserve's emergency loan program over the past week, adding to evidence that credit problems are easing.

Commercial banks averaged $14.6 billion in daily borrowing for the week that ended Wednesday, the Fed reported Thursday. That was down from $14.8 billion in average borrowing for the previous week.

Banks have been scaling back their use of the Fed's emergency ``discount'' loan window as financial conditions have improved. At the peak of the financial crisis in the fall of 2008, daily borrowing from the discount window reached $110 billion as banks found their normal sources of credit frozen.

Banks pay just 0.50 percent in interest on the emergency loans.

The Fed said that banks' use of short-term loans drawn from the Fed's ``term auction credit'' program was unchanged at an average of $38.53 billion this past week, far below the $377.33 billion average for those loans a year ago.

The report also showed that some of the assets the Fed took on when it bailed out insurer American International Group Inc. in 2008 have dipped in value.

The Fed's holdings of residential mortgage-backed securities from AIG were valued at $15.48 billion as of the end of December. That's down from nearly $15.50 billion at the end of September. The Fed's holdings of collateralized debt obligations, which are complex financial instruments that combine various slices of debt, were valued at $22.38 billion, down from $22.55 billion.

However, the Fed's holdings of assets from Bear Stearns were valued at $27.18 billion, up from $26.82 billion. The Fed took over some Bear Stearns assets in 2008 with the Wall Street firm was taken over by JP Morgan Chase.

Critics worry the Fed's actions have put billions of taxpayers' dollars at risk.

Even as banks have reduced borrowing from the Fed, the central bank's balance sheet - a broad measure that tracks the Fed's lending activities - stood at $2.23 trillion for the recent week, more than double the level before the financial crisis struck.

That growth in part reflects the impact of another Fed program aimed at driving down mortgage rates and aiding the housing market.

The Fed is on track to wrap up buying $1.25 trillion worth of mortgage securities from Fannie Mae and Freddie Mac at the end of March. As of Wednesday, the Fed held $971.4 billion of the securities, an increase of $1.2 billion from the previous week.

Fed Chairman Ben Bernanke on Wednesday laid out a plan for how the central bank will reel in all the stimulus money pumped out during the financial crisis.

It is sure to be a delicate task. Removing supports too soon could derail the economic recovery. Waiting too long could sow the seeds of another speculative bubble and unleash inflation.

Bernanke suggested he isn't in any rush to reverse course and starting boosting interest rates. The fragile economy needs the support of record-low rates, he said. But the Fed chief wanted to assure Wall Street and Congress that he has the tools and the political will to act when the time is right.

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