Fed lends less but banks, dealers still need cash

By Richard Leong

NEW YORK (Reuters) - Wall Street demand for cash and loans from the Federal Reserve fell this week, but remains at lofty levels, suggesting bottlenecks persist within the credit market.

The rates which banks charge each other for short-term loans have been rising, pointing to reluctance among banks to part with their money, analysts said on Thursday.

"We are still stuck, banks still don't trust each other, liquidity is poor and lending is not happening. We are not going to get out of this in the near term," said Kurt Karl, head of economic research at Swiss Re in New York.

The three-month London interbank offered rate posted its biggest one-day rise on Thursday. The global rate benchmark rose to 2.81750 percent from 2.73375 percent on Wednesday.

Although funds have flown more freely given the Fed's menu of liquidity measures, greater credit availability may also be due to falling loan demand by companies facing an economy at the brink of recession, analysts said.

"Going forward we would have to look to see, with the economy now in the throes of a recession as most people think, whether the appetite for commercial paper will lessen," said Kenneth Kim, economist with Stone & McCarthy Research Associates, in Princeton, New Jersey.

Overall, commercial banks' and Wall Street dealers' borrowings from the Fed's discount window totaled $32.7 billion in the week ended April 16, down 24 percent from a week ago.

WEAKER TSLF DEMAND

Dealers also pared their participation at the Fed's latest auction of Treasury securities from its term securities lending facility.

The TSLF program allows dealers to exchange mortgage-backed securities for ultra-safe U.S. government bonds for 28 days.

The latest TSLF auction fetched a bid-to-cover ratio, a gauge of demand, of 1.40, down from 1.88 at a similar-sized auction two weeks ago. The stop-out rate, or clearing level, was 0.10 percent, the minimum bid rate set by the Fed and below 0.16 percent two weeks ago.

"So from a financing perspective, the fact that the rate wasn't bid up indicates that nobody really needed this funding," said George Goncalves, chief Treasury, agency/TIPS strategist at Morgan Stanley, in a research note.

In another sign of possible weakening credit demand, the overall U.S. commercial paper market shrank for a second straight week to $1.817 trillion in the week ended April 9, down $10.8 billion from a week earlier, according to Fed data released on Thursday.

(Additional reporting by Ellen Freilich and John Parry; Editing by Leslie Adler)