Emergency borrowing from the US Federal Reserve has hit its highest level since September 12, 2001, as American banks struggle to secure funds in the face of the country’s continuing credit crunch.

The banks had $7.1 billion (£3.5 billion) of so-called “discount window” loans outstanding on Wednesday night, a more-than-sixfold increase on the $1 billion recorded a week earlier, according to the Fed.

The jump in discount borrowing is the result of a push by America’s central bank to reduce the stigma associated with these loans, which traditionally have been tapped only as a last resort by banks, often in a last-ditch attempt to avoid bankruptcy.

Last month, the Fed cut the rate charged on discount window loans from 6.25 per cent to 5.75 per cent as one of a series of steps to boost liquidity by encouraging the banks to borrow from it. The other measures included extending the term of these loans from one day to thirty days.

At the same time, the Fed lent heavily on America’s biggest banks in the hope that they would avail of the “window”, paving the way for smaller borrowers to use it without losing face. Two days later, America’s four biggest banks – Citigroup, JPMorgan Chase, Bank of America and Wachovia – said that they would be borrowing $500 million each from the discount window. The Fed, which initially injected billions of dollars into the banking system in the United States after the collapse of America’s sub-prime mortgage industry, also began to cut down such cash infusions to force borrowers to the window.

Ethan Harris, chief US economist at Lehman Brothers, said: “The Fed was very keen to remove the psychological block associated with the discount window, to get banks used to the idea of using it so that it could give useful extra back-up in the event of a further credit crisis.

“It is also an attempt to try and preempt further problems by keeping liquidity levels as high as possible.”

Mr Harris said that the Fed’s “carrot and stick” approach – improving the terms and acceptability of the window, combined with cutting back alternative sources of financing – was clearly working. The Fed’s push to increase the use of its discount lending is one of a series of measures that it is deploying as it seeks to control the credit crisis and steady the markets.

This comes ahead of the Fed’s policy meeting on Tuesday, where the key federal funds rate is expected to be cut for the first time in four years. Analysts expect a cut in the present rate of 5.25 per cent by between 0.25 and 0.5 percentage points as the Fed seeks to boost the economy as fears of a recession grow.

Merrill Lynch said yesterday that it would have to make an undisclosed writedown on the value of bonds it holds that are backed by sub-prime home loans. In a filing to the US Securities and Exchange Commission, the firm said that “significant risk remains that could adversely impact these exposures and results of operations”.

Rises and falls

—Retail sales in the United States rose by 0.3 per cent in August, well short of the consensus estimate of 0.5 per cent, and below the revised 0.5 per cent gain recorded in July, according to the Commerce Department

—A separate report from the Labor Department showed that the price of goods imported into the US unexpectedly fell by 0.3 per cent in August as oil and gas costs dropped. The decline is the first since January and should slow inflation, at least temporarily

—The two new surveys make it even more likely that the Federal Reserve will cut its key lending rate, presently at 5.25 per cent, by between 0.25 and 0.5 percentage points next week

—The Fed is expected to cut rates in a bid to avoid a potential recession in the wake of the fallout from America’s credit crisis

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