Banks posting a variety of assets as collateral with Fed

Economist David H. Wang told BloggingStocks Monday it's too soon too tell if the varied assets posted constitutes a sign of improving balance sheets and credit market conditions, or the converse.

"On the one hand, one could read into the report that banks are not simply parking assets they could not refinance elsewhere," Wang said. "On the other hand, one could argue that it could be a statement by banks to post very good collateral up front, to better-position the bank with the Fed, should future emergency funding be necessary."

'Season' has just begun

Moreover, for the above reason Wang cautioned against forming a conclusion -- either way -- from the above data. "Investors and business executives have to remember that the credit climate is like a baseball season: you can't tell much from only one game of 162. Similarly, you can't place too much emphasis on only one data point, but you have to look at 10, 20, 30 over months before we can tell if conditions are improving or not," Wang said. "We are very early in this credit condition or credit 'season.' Think of it as being equivalent to the month of April of the [major league] baseball season."

In December 2007, the Fed established a Term Auction Facility to provide another vehicle for short-term liquidity for banks. Federal Reserve Chairman has testified before Congress that the term auction facility will remain open "for as long as necessary."

The Fed established the term auction facility after it became clear that banks were reluctant to borrow from the Fed's tradition window, the discount window, for fear of being stigmatized by other banks and/or telegraphing that it 'needed Fed money' for short-term liquidity needs.