The US Federal Reserve said on Wednesday 19 December that 93 financial institutions had entered bids in its first auction of short-term credit. The turnout suggests that banks may be more inclined to borrow from the Fed through its auction-based system.

US banks usually fear negative reactions from investors if they borrow directly from the Fed, which is interpreted by many as a sign of weakness. The auction, which the Fed announced last week, tries to neutralise the stigma by offering banks the opportunity to borrow anonymously from the central bank, at a lower-than-usual interest rate.

The auctions are part of the Fed's effort to increase the US's credit supply. Banks have been reluctant to lend to businesses, consumers and other banks because of the turmoil in the financial markets that has led to billions of dollars in losses for financial firms.

At the first auction on Monday, banks and other financial institutions were allowed to bid for a total of $20 billion in 28-day loans, offering the highest interest rate they would be willing to pay.

The winning bids were awarded at a 4.65 per cent interest rate, lower than the Fed's discount rate for direct borrowing by banks, which was lowered by 25 basis points to 4.75 per cent on 11 December. Economists say these auctions attract banks to a line of credit they would normally ignore.

The Fed got bids for more than $61.55 billion at Monday's auction, three times the available credit. Loans will be issued to the winning institutions on Thursday. They mature on 17 January.

The central bank did not disclose the number of winning bids or the size of the awards, which could range from $10,000 to $2 billion. The minimum bid was $10 million, with a minimum bid rate of 4.17 per cent.

The Fed will hold a second $20 billion auction on Thursday, when it will offer 35-day loans. Additional auctions will take place on 14 and 28 January; the amounts are yet to be announced. Analysts believe the auction is a sign that the bank is less likely to lower interest rates at its next meeting in January.

The Fed's auction is part of a $34 billion injection of liquidity into global markets. Last week, the European Central Bank lent $10 billion in an auction and the Swiss National Bank lent $4 billion.