WASHINGTON (AP) - Action taken by the Federal Reserve on Friday targeting
the global credit crisis, in concert with European central banks, included an
injection of cash into the stricken student loan market through a special
lending operation.
Lawmakers and the student loan industry have been pressing for such action
by the central bank for weeks, as distress in the credit markets has caused more
than 60 lenders to stop making federally guaranteed student loans, either
temporarily or permanently.
The exiting lenders, which include college loan agencies in several states,
account for an estimated 15 percent of the federally backed student loan market.
Their departure comes at the time when students headed to college next year must
lock in their loans.
In the move, the Fed is allowing investment firms and banks to use bonds
backed by federally guaranteed student loans as collateral for the loans of safe
Treasury securities that the central bank is making available.
"The Fed's decision...will help inject much-needed liquidity into the
student loan market," Sen. Christopher Dodd, D-Conn., chairman of the Senate
Banking Committee, said in a statement.
More than two dozen lawmakers of both parties earlier this spring asked the
Fed to inject cash into the student loan market by taking that action. But Fed
Chairman Ben Bernanke responded in a letter that it wasn't the central bank's
intention to do so at that point.
"I am pleased that the Federal Reserve Board has changed its policy," Dodd
said in his statement.
He said the move, coupled with legislation passed by Congress this week
giving the Education Department temporary authority to buy loans from student
lenders to ensure their access to capital "represents a timely response to
funding concerns in the student loan market and should allow lenders to continue
to make loans to students who need them."
President Bush is expected to sign the legislation, which also would let the
education secretary advance federal money to designated companies that would
operate as "lenders of last resort" if they run out of capital to make new
federally backed loans.
The Fed said Friday it was boosting the amount of emergency reserves it
supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied
in April. The Fed took this action and several other moves to boost credit in
coordination with the European Central Bank and the Swiss National Bank.
The latest moves are part of a series of actions the Fed has made since the
credit crisis struck in August.
The efforts are designed to increase reserves so that banks don't become
hesitant about lending to consumers and businesses, which would make the current
economic slowdown even more severe.
The Fed's decision to boost the amount of loans it makes to banks every two
weeks, in a process known as a Term Auction Facility, was aimed at sending a
strong signal that the central bank is prepared to supply as much in reserves as
U.S. banks need. The latest move was made in coordination with the European
central banks' efforts to bolster their financial systems as well.
The European Central Bank said it will increase the amount of dollars
offered to $25 billion in the latest series of tenders, with the auctions to
come every two weeks. The tenders' maturity will be 28 days. Previously, the ECB
has auctioned off amounts that have ranged from $10 billion to $15 billion per
tender but without a set schedule.
----
Associated Press writers Martin Crutsinger in Washington and Matt Moore in
Frankfurt, Germany, contributed to this report.
Copyright 2008 Associated Press. All rights reserved. This material may not be
published, broadcast, rewritten, or redistributed.
|