Fed Banks help ease the credit squeeze

Source: Exec Digital USA

Date :12/13/2007 9:25:05 AM

The Federal Reserve, under pressure to take more aggressive action, unveiled a plan yesterday designed to bring banks and their borrower’s relief.

Banks squeezed by a global credit crisis have a new way to get their hands on cash so they can keep making loans to individuals and businesses.

The cash relief comes as the credit crisis has unhinged Wall Street and threatened to damage the U.S economy, which is struggling to avoid a recession.

The credit crisis hit the banking institutions hard and caused a meltdown in the housing and credit markets, which made banks and other financial institutions reluctant to lend to each other, causing a cash crunch.

Banks have to maintain a certain level of cash reserves, which changes every day. During normal times — when credit is smoothly flowing — a bank, on some days, may be short on its reserves and would need to borrow from another bank to make up the difference. Or, a bank may have excess reserves, which it is willing to lend to another bank.

Now, however, during the credit crunch, many banks have been hoarding cash — not wanting to lend or borrow from others banks. That makes it harder and more expensive for individuals and businesses to obtain credit from banks to finance all sorts of things, such as homes, cars, schools and small-business ventures.

At the heart of the Fed's plan is the creation of a new temporary facility to provide banks with up to $40 billion in emergency loans. The Fed is trying to shore up the finances of the banking system.

If banks have adequate cash on hand, they may be more likely to make loans to people and businesses that need them. The free flow of credit is the economy's lifeblood. It allows people to make big ticket purchases and businesses to build and expand.

The plan won't have an immediate impact on the availability and cost of credit to individuals, but it should help over the course of the coming weeks, analysts said.

December 13, 2007