09/07/2008

Fed may extend bank aid

The interim programme that entitles investment banks to take advantage of low-cost overnight loans is being considered for extension, according to US Federal Reserve Chairman Ben Bernanke.

Speaking at a forum in Arlington, Virginia on Tuesday, Bernanke said the Fed is concerned that the credit crisis may continue longer than expected, spurring additional need for the Term Securities Lending Facility (TSLF), which was originally set up to help alleviate the liquidity logjam created by Bear Stearns’ woes.

The Primary Dealer Credit Facility, which provides direct loans, was to last for at least six months when it was originally put into effect.

Under federal law, the programme can only continue if the Fed deems there are “unusual and exigent circumstances” in the markets. It allows the government to hold as collateral a wide variety of investments, including hard-to-sell securities backed by mortgages.

Securities firms have cut back on their use of the programme as well as the primary dealer credit facility (PDCF), in recent weeks. The balance of loans outstanding from the PDCF dropped to zero as of 2 July, the first time that has happened since the programme began. On 26 March, the end of the first full week of operation, the PDCF had a balance of $37bn.

Meanwhile, bids in the TSLF's weekly auctions, in which dealers swap securities such as mortgage-backed debt for treasurys from the New York Fed, have declined since the start of the programme. In the 3 July operation, firms submitted bids for $26.1bn out of $50bn of treasurys offered.