Fed Provides $20 billion in Loans to Banks
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WASHINGTON — The Federal Reserve is providing $20 billion in loans to banks as part of an unprecedented auction process to ease a global credit crisis and make sure financial institutions can keep lending to their customers.
The central bank today announced banks’ use of a new auction facility that was created to encourage banks to seek cash directly from the Fed to help them overcome credit problems.
The Fed announced that the interest rate on the short-term loans will be 4.65%, which is slightly less than the 4.75% the Fed charges banks on emergency loans through its “discount” window. Banks have been reluctant to use the Fed’s discount window because of the fear that investors will believe they are having trouble getting funds in a normal manner.
The Fed received bids from banks for $61.6 billion worth of loans, an indication the Fed had been successful in achieving its goal of encouraging banks to use the new auction facility.
In its announcement of the auction results, there were 93 bids for the emergency loans. Each bank could submit up to two bids. The auction for the loans was conducted on Monday, and the results released today.
A second auction will be conducted tomorrow, offering banks another chance to get a slice of another $20 billion in loans. The Fed said it would conduct two more auctions in January and then assess whether the process was worth continuing.