Fed loans to banks highest since Sept. ’01

Direct loans made by the Federal Reserve to banks at its so-called discount window climbed to the highest level since September 2001 as lenders turned to the central bank as a source of funding after a jump in borrowing costs.

Discount loans rose to a daily average of $4.6 billion in the week that ended Wednesday, up $1.6 billion from the week before, the Fed said. Central bank officials, who have encouraged banks to take out direct loans since the August credit collapse, last month expressed frustration at a continued “stigma” associated with using the resource.

“The bottom line is they have certainly jarred something loose and managed to overcome the resistance many banks had in going to the discount window,” said Christopher Low, chief economist at FTN Financial in New York. “The downside is how difficult it is for banks to get funding right now, so difficult that they are turning to the Fed.”

The increase in discount-window lending came as the Fed introduced a new tool in an effort to alleviate funding pressures spurred by losses on securities tied to sub-prime mortgages. The central bank is lending $40 billion to banks this week through a pair of auctions.

The first auction under the so-called term auction facility was conducted Monday and garnered bids for triple the $20 billion in credit offered by the Fed.

“The fact that the TAF auction went as well as they hoped may have actually reduced some of the stigma at the discount window,” said Robert Eisenbeis, former research director at the Atlanta Fed. “The real question is whether the banks will hoard it or channel it to places where they need it the most.”

Fed officials have voiced frustration since the August credit collapse that banks were loath to use direct loans because such a move would suggest that the lender was in trouble.