Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington. Separately, the Fed's loans to Wall Street bond dealers rose by $75 million to $16.6 billion.
Policy makers have increased the attractiveness of direct loans as they seek to alleviate the impact of the credit crunch. Fed Chairman Ben S. Bernanke said two days ago that while markets have improved, they remain ``far from normal,'' adding that the central bank is prepared to increase its twice monthly auctions of funds to banks.
``The Fed is providing an extraordinary amount of liquidity through various mechanisms,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. While ``credit markets are showing signs of improvement'' there is ``a long way to go,'' he said.
Fed officials have reduced the cost of direct loans to a quarter-point above the benchmark overnight lending rate between banks. In March, they extended the term of the loans to commercial banks to 90 days. The discount rate is now 2.25 percent, compared with the three-month London Interbank Offered Rate for the dollar of 2.72 percent.
`Good Sign'
``The fact that banks are willing to take advantage of it may be a good sign for the market,'' said Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. ``They're willing to take advantage of cheap money and'' lend it on to customers, he said.
Bernanke today urged banks to raise more capital to help limit damage to the economy. Banks and securities companies have raised about $244 billion of capital since July, after writedowns and credit losses in excess of $333 billion.
Fed policy makers in March created the Primary Dealer Credit Facility to offer direct loans to the 20 brokers that trade Treasury securities directly with the New York Fed. The resource allows Wall Street banks to borrow money at the discount rate overnight.
As of May 14, there was $14.5 billion of loans outstanding in the primary-dealer program, while commercial banks had $13.4 billion of discount-window loans, the Fed reported.