Banks trim borrowing from Fed's emergency program

Banks borrowed less from the Federal Reserve's emergency lending facility over the past week and cut back on other programs designed to ease the financial crisis, encouraging signs that some credit stresses are easing.

The Fed on Thursday said commercial banks averaged $35.9 billion in daily borrowing over the week that ended Wednesday. That was down from $39.1 billion in the week ended June 24.

Investment firms didn't draw any loans for the seventh straight week. The last time they drew any money _ just $482 million _ was in the week that ended May 13.

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

The weekly lending report showed the Fed's net holdings of "commercial paper" averaged $119 billion over the week that ended Wednesday, a decrease of $8.4 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 $462.5 billion over the past week, down $4.6 billion 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 inched down this week but still remain above a record low of 4.78 percent posted earlier this year.

Rates on 30-year home loans dropped to 5.32 percent, from 5.42 percent last week, Freddie Mac reported Thursday.

Some analysts worried that a recent run-up in rates on mortgages and Treasury securities _ if prolonged _ could choke off prospects for an economic recovery. However, the Fed doesn't appear to buy that notion. The central bank last week opted not to expand purchases beyond the announced limits of $300 billion in government debt and $1.25 trillion in mortgage securities.

Squeezed banks have been borrowing from the Fed because they couldn't get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding much of their cash, rather than lending it to each other or customers. The 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 & Co.

Critics worry the Fed's actions have put billions of taxpayers' dollars at risk. Bolstering those concerns, the assets the Fed took on last year when it bailed out Bear Stearns and insurer American International Group Inc. have dipped in value.

The report also said that credit provided to AIG averaged $42.8 billion for the week ending Wednesday, up slightly from the previous week.

The central bank's balance sheet stands at $1.986 trillion, down from last week. The balance sheet has more than doubled since September, reflecting the Fed's many unconventional efforts _ various programs to lend or buy debt _ to mend the financial system and lift the country out of recession.