Demand for emergency lending is still elevated

WASHINGTON • Commercial banks and investment firms reduced borrowing from the Federal Reserve's emergency lending program during the past week, although demand for the loans was still elevated.

The Fed's report, released Thursday, showed commercial banks averaged $91.6 billion in daily borrowing during the past week.
That was down from $95.4 billion in average daily borrowing logged during the week ended Nov. 12.

For the week ending Wednesday, investment firms drew $50 billion. That compared with $64.9 billion in the previous week. This category was recently broadened to include any loans made to the U.S. and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.

The Fed report also showed its net holdings of "commercial paper" came to $270.9 billion Wednesday, up from $257.3 billion last week.

Under the program started Oct. 27, the Fed is buying mounds of the crucial short-term debt companies use to pay everyday expenses. The Fed has said about $1.3 trillion worth of commercial paper would qualify.

In addition, the report said insurance giant American International Group's loan from the Fed stood at $87.4 billion. That doesn't reflect the restructured loan agreement to the insurer announced by the government last week.

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 lend it to each other or customers. The lockup in lending has contributed to a sharp slowing in the overall economy.

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

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 1.25 percent in interest for the emergency loans.