NEW YORK (Reuters) - Banks in the United States have been quietly borrowing "massive amounts" from the U.S. Federal Reserve in recent weeks, using a new measure the Fed introduced two months ago to help ease the credit crunch, according to a report on the web site of The Financial Times.
The newspaper said the use of the Fed's Term Auction Facility (TAF), which allows banks to borrow at relatively attractive rates against a wide range of their assets, saw borrowing of nearly $50 billion of one-month funds from the Fed by mid-February.
The Financial Times said the move has sparked unease among some analysts about the stress developing in opaque corners of the U.S. banking system and the banks' growing reliance on indirect forms of government support.
Here's a link to the Financial Times. In early fall we were hearing that banks were too scared of the stigma of borrowing at the discount window and that something had to be done to get them to step up. Remember this? So it seems a little odd to get worked up about this now--except for the fact that the collateral requirements are less stringent than for open market operations. So yes, on the margin, this is less secure. However, it is important to remember that the TAF is meant for banks that are in generally good condition and are eligible for the primary credit discount window. I wouldn't look for them to close the facility any time soon. It is doing exactly what they want it to do, and they are gathering important data about how to improve the working of the ordinary discount window.
Thanks for this post. One of the AB readers was hungry for something on TAF as he thought this meant our banking system was on the verge of collapse. Hopefully, AB readers will take a deep breath and relax.
Here's Caroline Baum from last week:
'Reserves can be borrowed (from the Fed's discount window) or non-borrowed (supplied via the Fed's daily open market operations). It matters not one whit to the Fed where the banks acquire the reserves they require. If they borrow directly from the Fed, they don't need to tap the interbank, or fed funds, market.
'What's caused the hullabaloo recently is the dive in non- borrowed reserves from $44 billion in early December to minus $8.8 billion at the end of January.
'It isn't a mystery what happened. The Fed announced the creation of a Term Auction Facility on Dec. 12, enabling banks to borrow for 28 days versus a wide range of collateral. The minimum bid the Fed accepts is the expected funds rate one month out, which in the current environment means cheaper funding costs than the fed funds market.
'So what would you do if you were a bank?'
OK, Caroline Baum notes that total reserves did not change very much. The problem is that she did not ask the question - what would have happened to reserves had TAF not been adopted? During this period, the monetary base appeared to be drifting downwards perhaps because banks were planning to increase their excess reserves. Well perhaps TAF alleviated some of the downward pressure on the monetary base - and if so, this was a very good thing.