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Scouring Thursday's Fed Data For Discount-Rate Borrowing

 
   By John McAuley 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--There's heightened interest in what until recently had been a fairly arcane U.S. Federal Reserve release on borrowings under the discount window.

That release has taken on new prominence given the Fed's actions Friday to cut the discount rate by 50 basis points to 5.75% and encourage banks to use the facility as a way to alleviate tight borrowing conditions in short-term funding markets.

The H-4.1 release is formally titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," and is released by the Fed each Thursday at 4:30 p.m. covering the week ended the day before.

The report presents data on discount window borrowing in total and broken down for primary, secondary and seasonal credit facilities. The Fed defines primary borrowings as "short-term source of liquidity" for institutions in "sound financial conditions," while secondary borrowings - the rate for which is 50 basis points above the primary discount rate - are for those institutions that do not qualify under the primary facility. Seasonal credit facilities refer mainly to agriculture borrowings and seasonal tourist business.

The interest in this week's report has been further heightened by the announcement on Wednesday that four major commercial banks - Bank of America (BAC), Citibank (C), JP Morgan Chase (JPM), and Wachovia (WB) - had each borrowed $500millionthrough the discount window facility. Deutsche Bank (DB) said later it had used the facility last Friday, without providing an amount.

Dave Greenlaw, senior economist at Morgan Stanley in New York, Wednesday in his data preview for the coming session published a preview for Thursday's discount window borrowings.

Greenlaw said that his guess at the week's primary credit lending - "and it is really little more than a guess" - was that including the four banks that had borrowed $500 million each and other banks that had likely used the facility, the borrowings Wednesday could equal $8.0 billion and the weekly average borrowing would be $1.0 billion. "It's been a long time since I've focused on this," he added.

He expects that this report will be a focal point for some time to come.

Lou Crandall, chief economist at Wrightson ICAP in Jersey City, N.J., regularly scrutinizes the H-4.1 release as a primary ingredient in his monetary reserve forecasting exercise. "I don't forecast the discount window borrowing as such, but I will make an assumption about discount window borrowings to come up with a reserve forecast," he said.

Crandall noted that while Citibank said that its borrowing was done on a term basis, the other three banks said only some of their borrowing was on a term basis - i.e., longer than overnight borrowings.

One thing is fairly clear, the more widespread scrutiny of the H-4.1 on Thursday will not be a one-time deal. Economists will continue to watch these data.

Indeed, Morgan Stanley's Greenlaw notes that while his $8.0 billion guess for Wednesday is high compared with recent experience, "it would still indicate limited progress in stabilizing financial markets." He believes that "the Fed would ultimately like to see $20.0 billion - or even $50.0 billion - of discount window borrowing." To achieve this he expects the Fed "will have to set the discount rate at a level that makes institutions look foolish if they don't borrow."

That's well below 5.75%.

-By John McAuley, Dow Jones Newswires, 201-938-4425; john.mcauley@dowjones.com

(END) Dow Jones Newswires

August 23, 2007 13:20 ET (17:20 GMT)


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