Strong Turnout for Fed Auction-December 19, 2007
By MICHAEL M. GRYNBAUM
The Federal Reserve said Wednesday that it had collected 93 bids on $20 billion in 28-day loans in its first auction of short-term credit, a strong turnout that suggests banks may be more inclined to borrow from the Fed under the new auction-based system.
Banks have typically feared backlash from investors when borrowing directly from the Fed, which some interpret as a sign of desperation. The new auction plan, announced last week, efforts to combat that stigma by offering banks the opportunity to borrow directly from the central bank in an anonymous forum and at a lower-than-usual interest rate.
The auction, which was held on Monday, resulted in a 4.65 percent interest rate on the direct loans, 0.1 percentage point lower than the Fed’s so-called discount rate, which normally regulates any borrowing from the central bank. The discount rate was lowered to 4.75 percent last week.
The Fed received more than $61.55 billion in bids, three times the available credit. Loans will be issued to the winning institutions on Thursday and mature on Jan. 17.
“The stigma that banks had previously assigned to borrowing from the Fed under conditions of duress appeared to have diminished,” Joseph Brusuelas, chief United States economist at IdeaGlobal, wrote in a research note.
Mr. Brusuelas said the turnout for the auction suggested that banks are eager to shore up capital for lending purposes but that the problems in the credit market had not yet reached a boiling point.
“A broad number of financial institutions remain concerned with year-end refunding, but the quantity demanded does not suggest an impending systemic crash,” he wrote.
The Fed will hold a second $20 billion auction on Thursday, when it will offer 35-day loans. Additional auctions will take place on Jan. 14 and 28, with amounts to be announced next month.
The Fed did not announce the number of winning bids or the size of the awards from Monday’s auction. The minimum bid was $2 million, with a bid rate of 4.17 percent. Awards could range from $10,000 to $2 billion.
Fed officials set up the new system in response to increasing pressures on the credit market, as banks become more reluctant to lend to businesses, consumers, and one another in light of the recent turmoil in the market for mortgage-backed securities. Bad bets on assets backed by subprime home loans have led to billions of dollars in losses for the nation’s major financial firms.
