Bank borrowing from the Fed surges

NEW YORK (Reuters) - Top-rated banks borrowed an average of $1.2 billion per day from the Federal Reserve during the week ended August 22, the highest level since September 2001, Fed data showed on Thursday.

All banks, including those of lesser credit quality, borrowed from the Fed at an average rate of $1.541 billion per day in the week ended August 22, more than six times the average amount of borrowing in recent weeks, according to Fed data.

Total bank borrowing in the latest week topped the average daily borrowing of about $250 million in recent weeks.

The Fed last week lowered the discount rate, or the rate at which the Fed lends directly to banks, by 50 basis points in an effort to ease constricted conditions in credit markets.

The move took the Fed's lending rate to top-rated banks, called the primary credit rate, down to 5.75 percent, and the rate to banks with lesser credit, called the secondary credit rate, down to 6.25 percent.

Bank primary credit borrowings averaged $1.2 billion per day during the week ended August 22, compared with $11 million the previous week.

Secondary credit borrowings rose to an average of $85 million in the week from no secondary credit borrowings the week previous.

Some analysts have questioned whether the additional bank borrowing from the Fed is sufficient to free up liquidity in the mortgage market, where it is most needed.

Fed primary credit borrowings totaled $2.001 billion on August 22, which was the largest one-day amount since April 12, 2006, when it was $3.6 billion, according to Fed data. The highest single-day record was on September 12, 2001, when it was $45.6 billion.

Several top banks said on Wednesday they took the rare step of borrowing over $2 billion in total from the Fed through the discount window.

Citigroup (C.N), Bank of America Corp. (BAC.N), Germany's Deutsche Bank (DBKGn.DE), JPMorgan Chase & Co (JPM.N) and Wachovia Corp WB.N said they took the step for the sake of the financial system.

In addition to trying to reassure the markets, the banks also were looking to remove the stigma of getting short-term financing from the Fed. All five banks emphasized they have access to other, cheaper funds.

The banks must post collateral when they borrow from the Fed's discount window. It was not clear which types of loans or securities the banks used as collateral.