Banks borrow more from Federal Reserve

WASHINGTON -- Banks have stepped up their borrowing from the Federal Reserve, encouraged by central bank policymakers to help stem a credit crunch that has roiled Wall Street.

The Federal Reserve said the daily average borrowing for the week ending Wednesday was $1.2 billion. That was the highest since the attacks of Sept. 11, 2001, the Fed said in a report Thursday.

On Wednesday alone, the borrowing reached $2 billion, the most in a single day since April 12, 2006, the Fed said.

The report offered the best look so far at how banks were using the "discount window" after the Fed's announcement last Friday it was cutting rates to banks for these loans.

The Fed lowered the discount rate -- its rate on loans on so-called primary credit -- by one-half of a percentage point to 5.75 percent. The unusual move was the Fed's most aggressive action to date to alleviate the credit crisis.

Timothy Geithner, president of the Federal Reserve Bank of New York, and other Fed officials have urged banks to borrow from the Fed's discount window. These officials have tried to overcome the negative perception the Fed is a place for banks to turn only as a last resort.

Besides lowering the rate on these loans, the Fed is now allowing loans of up to 30 days versus the normal one day. The Fed also is letting banks put up a range of collateral to back the loans.

The Fed has been reluctant to use its most potent weapon, a cut in the federal funds rate. This important interest rate has stood at 5.25 percent for more than a year.

This is the rate of interest banks charge each other on overnight loans and is the central bank's main lever to influence economic activity. A cut in the funds rate would cause commercial banks to lower their prime lending rate charged to millions of people and businesses.

The odds, though, are growing that the Fed will cut the funds rate on or before Sept. 18, its next regularly scheduled meeting, analysts say. The Fed has not lowered the funds rate in four years.

Fed officials will watch closely for signs that the credit problems, financial turbulence and the worsening housing slump are crimping spending and investment by people and businesses.