Fed pumps billions more into banks

NEW YORK (CNNMoney.com) -- The Federal Reserve announced Monday that it will make hundreds of billions more dollars available to the nation's banks in return for a wide range of troubled collateral.

The central bank said that its so-called term auction facility, which accepts financial instruments such as mortgage-backed securities as a collateral, will be doubled immediately to $300 billion. The total amount available to banks will rise to $600 billion under the moves announced Monday.

In addition, the Fed signaled it could increase the amount available through those loans to $900 billion by the end of the year, increasing the amount the Fed will loan through the program by $750 billion above its previous limit.

The moves come in the wake of the passage on Friday of a $700 billion bailout bill that will allow Treasury to buy damaged assets directly from banks and Wall Street firms.

The term auction facility was announced in December as a move to pump cash into the already battered credit markets. The Fed allows banks to bid in an auction for the rate they're willing to pay to borrow the funds, and it accepts a much wider range of collateral for the loans than in other forms of lending by the central bank.

The Fed started loaning $20 billion in its first auction in December, but it quickly reached a $150 billion limit by late May and has stayed at that level since then.

The auctions are split between different length loans. The Fed's statement Monday said it doubling both its 28-day and 84-day auctions to $150 billion each immediately.

The Fed also announced it would pay banks interest on their reserve holdings. That change had been set to start in 2011, but its effective date was moved up as part of the bailout legislation enacted on Friday.

Paying interest will allow the central bank to have control over the fed funds rate, its key overnight lending rate target.

The Fed announces its fed funds rate target after every meeting of its policymakers. But in fact the rate is movable: The central bank must buy and sell treasuries to maintain it close to the target.

It potentially could be hard for the Fed to keep the funds rate close to its target as the central bank takes on so many troubled financial assets as collateral - rather than holding treasuries. By agreeing to pay interest equal to the fed funds, there is little chance that the fed funds rate will fall below the target.

The crisis in financial markets was spreading around the globe, sending overseas stocks sharply lower Monday while U.S. stock futures also fell.