Banks’ demand for loans outpaces supply

WASHINGTON Cash-strapped banks took the U.S. Federal Reserve Board up on its offer of $20 billion (U.S.) in short-term loans to help them overcome credit problems, but the interest rate wasn’t as low as some had hoped. The central bank said yesterday that it had received bids for $61.6 billion worth of loans, more than three times the amount made available.

The loans carried an interest rate of 4.65 per cent, which is slightly less than the 4.75 per cent 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’re having trouble getting funds in a normal manner. There were 93 bids for the loans, the Fed said. Each bank could submit up to two bids.

The auction for the 28-day loans was conducted on Monday, and results were released yesterday. Asked how the first auction fared, T.J. Marta, a fixed-income strategist at RBC Capital Markets, replied: I was standing next to two seasoned traders and one thought this auction was fantastic and another one thought it was horrible.

For his own part, Marta said it was unsatisfying because investors had thought the rate on the loans would have been lower, around 4.30 per cent or 4.40 per cent, rather than 4.65 per cent. There was a hope that things really weren’t that bad and that the market would have been able to bid down the Fed and take the money at a cheaper rate, Marta said. The fact the market wasn’t really willing to, was evidence of the stress.