Fed Extends Emergency-Loan Programs, Swaps to Oct. 30

The Federal Reserve extended its emergency-lending programs and foreign currency-swap lines by six months through Oct. 30, citing “continuing substantial strains in many financial markets.”
By: Scott Lanman and Simon Kennedy: Bloomberg.com
The decision applies to five emergency-lending programs that provide funds or Treasury securities to securities brokers, money-market funds and companies that issue commercial paper, along with swap lines with 13 other central banks, the Fed said today in a statement in Washington. The programs had been previously authorized through April 30.

The move signals Fed Chairman Ben S. Bernanke and colleagues see credit markets in the U.S. and around the world taking longer to repair than previously thought. The lending programs are authorized under a provision allowing loans to non- banks under “unusual and exigent circumstances.” Outstanding loans and swaps under the programs totaled $884 billion as of Jan. 28.

“There are a few signs that things are improving, but not very many,” said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co. in Washington. “By and large, things are still very, very tight. They’re just going to have to continue to extend this until they see some thawing.”

The Fed’s decision applies to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Money Market Investor Funding Facility, the Primary Dealer Credit Facility and the Term Securities Lending Facility.

Currency-Swap Programs

The Fed extended currency-swap programs with the central banks of Australia, Brazil, Canada, Denmark, the U.K., the euro region, South Korea, Mexico, New Zealand, Norway, Singapore, Sweden and Switzerland. The Bank of Japan will consider an extension when its policy makers next convene, the Fed said.

The dollar value of outstanding swaps has risen more than sevenfold since the Lehman Brothers Holdings Inc. bankruptcy in September, to $465.7 billion as of Jan. 28.

The expiration date of the Fed’s Term Asset-Backed Securities Loan Facility, a program set to start this month to prop up markets for consumer and business loans, remains Dec. 31, the central bank said. The Term Auction Facility, which lets commercial banks bid for loans, doesn’t have an expiration date.

In December, the Fed cut its main interest rate almost to zero and shifted its policy focus to the size and composition of the central bank’s balance sheet, whose assets have more than doubled to $1.93 trillion over the past year.

Frank, Bernanke Talk

“They have every capacity to take that liquidity back out if and when that becomes necessary,” House Financial Services Committee Chairman Barney Frank told reporters today, saying he had a “good conversation” yesterday with Bernanke.

Today’s action is the fourth extension of the currency swaps since the Fed began dispatching dollars around the world more quickly in December 2007. Under the arrangement, the Fed sends dollars abroad so that other central banks can auction them in their own markets.

The cost of borrowing in dollars yesterday rose to the highest level in more than three weeks as banks continued to balk at making loans. The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans, climbed to 1.23 percent today from 1.08 percent on Jan. 14, the British Bankers’ Association said.

Libor Drifts Higher

“There has been a somewhat troubling drift by three-month Libor as of late,” and the Fed’s action today may help bring the rate down closer to the central bank’s benchmark, said John Lonski, chief economist at Moody’s Capital Markets Group in New York, in an interview with Bloomberg Television.

“It’s going to boost confidence among investors regarding the adequacy of liquidity in the financial system,” Lonski said.

Last week, the Fed reported for the first time the amount of currency swaps with other central banks after previously listing them as “other assets” on its balance sheet. The swaps had risen by $2.88 billion to $465.7 billion over the previous week, it said.