Dec. 20 (Bloomberg) -- Direct loans by the Federal Reserve to banks climbed to the highest since September 2001 as lenders turn to the central bank as a source of funding following a jump in borrowing costs.

Loans at the so-called discount window rose $1.6 billion to a daily average of $4.6 billion in the week ended yesterday, the Fed said in Washington. Fed officials, who have encouraged banks to take out direct loans since the August credit collapse, last month expressed frustration at a continued ``stigma'' about using the resource.

``The bottom line is they have certainly jarred something loose and managed to overcome the resistance many banks had in going to the discount window,'' said Christopher Low, chief economist at FTN Financial in New York. ``The downside is how difficult it is for banks to get funding right now, so difficult that they are turning to the Fed.''

This week's increase in discount-window lending came as the Fed introduced a new tool in an effort to alleviate funding pressures spurred by losses on securities tied to subprime mortgages. The central bank will add $40 billion of funds through auctions under the program this month.

Banks and securities firms have reported charges of more than $80 billion since surging defaults on U.S. subprime mortgages prompted investors to shun related debt. Bear Stearns Cos. today reported its first-ever loss after writedowns of mortgage holdings.

International Effort

Fed officials are working with their counterparts overseas to alleviate elevated funding pressures. The central bank is making $24 billion available to the European Central Bank and Swiss National Bank to increase the supply of dollars in Europe. The ECB on Dec. 18 injected a record $500 billion into the banking system to bring down the cost of money.

Money-market rates have responded, falling from their highs this month while still exhibiting stress. The three-month dollar London Interbank Offered Rate, a benchmark for corporate borrowing, dropped to 4.88 percent today from 5.15 percent two weeks ago. The premium over the Fed's benchmark rate, at 0.63 percentage point, compares with an average spread of 0.24 percentage point the past two years.

The Fed yesterday said its first auction of the so-called Term Auction Facility garnered bids worth triple the $20 billion on offer. The second auction takes place tomorrow, with two more scheduled for January. The Fed doesn't reveal the names of banks using either the discount window or TAF.

Reduced `Stigma'

``The fact that the TAF auction went as well as they hoped may have actually reduced some of the stigma at the discount window,'' said Robert Eisenbeis, former research director at the Atlanta Fed. ``The real question is whether the banks will hoard it or channel it to places where they need it the most.''

Fed Vice Chairman Donald Kohn and other officials have voiced frustration since the August credit collapse that banks were loath to use direct loans because of a ``stigma'' that it suggested the lender was in trouble.

``You're getting money into the banking system, which is what the Fed wanted to do, so they should be pretty satisfied and that's encouraging,'' said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, which oversees $200 billion.

Rate Cuts

Central bankers have lowered the discount rate four times, to 4.75 percent, and narrowed the gap with their benchmark rate in an effort to ease liquidity strains. The main rate, the target for overnight loans between banks, is 4.25 percent. The usual spread between the rates is 1 percentage point.

The Fed also said a measure of the U.S. money supply rose by $16.6 billion in the week that ended Dec. 10. That left M2 growing at an annual rate of 6.4 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

During the latest reporting week, M1 decreased by $2.2 billion. Over the past 52 weeks, M1 has fallen 0.2 percent. The Fed no longer publishes figures for M3.

Fed Holdings

Foreign central bank holdings of Treasury and agency securities in accounts at the Fed increased by a daily average of $7.6 billion in the week that ended yesterday to $2.05 trillion, according to the central bank.

Foreign holdings of Treasury securities fell by $4 billion to $1.2 trillion, and holdings of agency securities increased $11.6 billion to $823.3 billion.

The Fed's own average daily holdings of U.S. government securities increased $5 million to $769.7 billion in the week that ended yesterday.

There were no net misses.

A net miss occurs when the actual reserve level in the banking system diverges from the Fed's projections for a day by $2 billion or more. If the level is outside expectations, the federal funds rate can deviate from target.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net.

Last Updated: December 20, 2007 18:15 EST