Fed could extend emergency lending to 2009 to combat credit crisis
The US Federal Reserve may extend its
unprecedented lending to investment banks into next year in the face of an
ongoing credit crisis, Fed Chairman Ben Bernanke said Tuesday as
government-chartered mortgage lenders Fannie Mae and Freddie Mac were
scrambling to raise new capital.
Bernanke said the central bank's emergency lending provisions, set up in March at the height of the credit crisis for a six-month period, could be carried into 2009 if the financial sector's "unusual and exigent circumstances continue to prevail."
Bernanke said the Fed was also working to improve government oversight of financial markets and warned that indefinite lending could encourage lax market standards in the long run.
"The Fed's decision to lend to primary dealers, although it was necessary to avoid serious financial disruptions, could tend to make market discipline less effective in the future," he said in a speech in Virginia.
The Fed in March allowed financial institutions access to Treasury securities that are usually reserved for commercial banks, and even accepted damaged mortgage-backed securities as collateral for the loans.
Investment banks and home lenders have reported billions of dollars in writedowns of mortgage-related assets, as plunging housing prices in the United States since 2007 forced a record number of homeowners to default on their mortgages.
Fannie Mae and Freddie Mac, which together provide more than half of US home loans, saw shares plummet by more than 16 per cent on Monday after a Lehman Brothers analyst reported they needed to raise about 75 billion dollars in fresh capital.
The two lenders have already reported a combined 11 billion dollars in writedowns amid a continuing decline in the value of mortgage-backed securities, dpa reported.