Banks cut borrowing from Fed, sign credit stress may be easing

WASHINGTON -- Banks trimmed borrowing from the Federal Reserve's emergency lending facility over the past week and cut back on other programs designed to ease the financial crisis, promising signs that some credit problems are easing.

The Fed said Thursday commercial banks averaged $34.97 billion in daily borrowing over the week that ended Wednesday. That was down from $35.91 billion in the week ended July 1.

The identities of the financial institutions are not released. They pay just 0.50% in interest for the emergency loans.

The weekly lending report showed the Fed's net holdings of "commercial paper" averaged $114 billion, a decrease of $5.5 billion from the previous week.

Commercial paper is the crucial short-term debt that companies use to pay everyday expenses, which the Fed began buying under the first-of-its-kind program on Oct. 27, a time of intensified credit problems. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

The report also showed the Fed trimmed its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. They averaged $462.4 billion over the past week, down $944 million from the previous week. The goal of the program, which started on Jan. 5, is to drive down mortgage rates and help the housing market.

Mortgage rates dipped for the second straight week but still remain above a record low of 4.78% posted earlier this year.

Rates on 30-year home loans dropped to 5.20%, from 5.32% last week, Freddie Mac reported Thursday.

Squeezed banks borrow from the Fed when they have trouble getting the money elsewhere. At the height of the financial crisis last fall, investors cut banks off and shifted money into safer Treasury securities. Financial institutions hoarded much of their cash, rather than lending it to each other or customers. That lockup in lending has contributed to the longest recession since World War II.

Investment houses in March 2008 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 and into a takeover by JPMorgan Chase.