Banks Jump At Fed Loan Auction

Banks flocked to the Federal Reserve’s inaugural loan auction designed to ease a credit crunch, with far more bids than could be accepted, the U.S. central bank said.

Ninety-three banks bid for $61.6 billion, more than three times the auction amount, the Fed said. The Fed awarded $20 billion in loans at a 4.65 percent interest rate, above the target rate for interbank lending but below the rate the Fed charges for other direct loans.

Banks at or above the interest rate, which is determined by the bids in the auction, are awarded loans. Those below are not.

Money Flows

The special auction is intended to keep money flowing. Banks have grown reluctant to lend to each other as they try to assess who is holding bad debt related to the subprime mortgage meltdown. That has pushed up interest rates and, in some cases, halted borrowing.

While the Fed regularly lends to banks through its so-called discount window, banks have been reluctant to borrow from the Fed for fear of it being seen as a sign they are in financial trouble. The new system provides more anonymity.

“The (auction) results seem to indicate that the stigma of borrowing from the central bank has lessened,” says Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.

Economists, however, differed when it came to analyzing the first-of-its-kind auction. Some, such as Rupkey, say the large number of banks bidding does not mean there’s a panic for funds but that the Fed’s “experiment worked well.” But Ryan Sweet of Moody’s Economy.com says the hefty number of bids points to considerable stress in financial markets.

Jay Mueller, senior portfolio manager at Wells Capital Management, notes some short-term lending rates have eased in recent days. Part of that dip is probably attributable to the Fed’s action, he says.

“It doesn’t make everything all better, ... (but) it appears to have helped,” Mueller says.

The auctions are part of a plan by the Fed and other central banks to prevent a credit crisis that could harm the global economy. It is the biggest coordinated action among central bankers since just after the Sept. 11 terrorist attacks.