In another move to help the troubled savings and loan industry, the Federal Reserve announced yesterday that it will make loans below market rates to S&Ls that are strapped for cash.
According to the Federal Home Loan Bank Board, about 470 S&Ls already have indicated that they would like to borrow funds from the Fed.
The new rates are 14 percent for 60 days, 15 percent for the next 90 days and 16 percent thereafter. That compares with rates of between 17 percent and 20 1/2 percent interest that S&Ls now must pay to borrow from the Federal Home Loan Bank system. S&Ls have $61 billion in loans outstanding from that system.
By contrast, the amount of Federal Reserve loans outstanding to commercial banks is between $3 billion and $5 billion. Banks routinely borrow funds overnight.
James Croft, director of district Federal Home Loan Banks, estimates that thrifts will borrow $1 billion or more from the Fed in the next few months. "Thrifts unfortunately have the misconception that the Fed has billions to lend them," Croft said. "This is not true."
No limit has been set yet on the amount thrifts can borrow, so the cost to the government of this subsidy cannot be determined.
The circumstances under which a thrift can borrow from the Fed are limited, as are the uses to which the funds can be put. S&Ls must have had cash-flow problems, must have made reasonable efforts to raise money and must have applied to a Federal Home Loan Bank.
But if a thrift's situation is really shaky, it also need not apply. S&Ls in truly dire straits are to be helped by the Federal Savings and Loan Insurance Corp.
After a thrift makes a loan application, the Fed and the bank board will decide which of the two, or a combination thereof, will make the loan and at what rate. Any thrift receiving funds will be prohibited from using them to make new loans, except to fulfill those required by the all-savers certificate provisions of the recently signed tax bill, or to pay back loans at higher rates. The federal subsidy is strictly for the purpose of shoring up the bottom line.
Croft said the Fed's action was not a bailout.