Wall St banks 'hooked on emergency funds scheme'

James Doran in New York
The Observer

Fears are mounting that Wall Street banks are relying too heavily on tens of billions of dollars in loans made available by the US Federal Reserve. Their borrowing levels have rocketed by almost 200 per cent to $38bn (£19bn) a day in just three weeks.

The latest loan data released by the Fed shows that Wall Street banks and investment firms borrowed an average of $38.4bn every day last week, a big jump from the $32.9bn borrowed the week before, but almost three times the $13.4bn borrowed when the emergency scheme was launched on 17 March.

The loan programme was part of a wider Wall Street rescue package ushered in to stave off the imminent collapse of Bear Stearns, the troubled investment bank being bought by JP Morgan.

The scheme, called the Primary Dealer Credit Facility, is made available through the Federal Reserve Bank of New York and is designed to help big investment banks oil the wheels of the credit market so they can continue with business as usual, even though the credit crunch shows no signs of abating.

The Fed has capped the amount available to all banks at $50bn, although insiders said it never imagined the banks would take advantage of the entire facility. Analysts and economists now fear it is being too heavily exploited, and that banks may be using it to delay facing up to liquidity problems.

David Wyss, the chief economist at Standard & Poor's, thinks the Fed loan programme is a good idea, and perhaps the only way that government can keep the credit markets churning. Even so, he believes taking out such large short-term loans could cause problems.

'My fear is that the banks could become too dependent on this money. At some point, the Fed will have to wean them off these loans, but how it does that I do not know,' he said.