Fri, Aug 24, 2007 - Page 1 News List

Leading US banks borrow from Fed to ease credit crunch


Four of the largest US banks said on Wednesday they had borrowed US$500 million each from the US Federal Reserve discount window, a move seen as helping ease a credit squeeze and reducing the stigma of such loans.

The unusual announcement came after the central bank had cut its discount rate for direct loans to commercial banks and taken other moves to get credit flowing.

US shares rose after the moves, as the banks' borrowing signaled battered credit markets may start to heal. Financial stocks were mixed amid lingering concern about mortgages.

Borrowing directly from the Fed has historically been seen as a sign of weakness, but Bank of America, JP Morgan Chase & Co, and Wachovia Corp said they did it for the sake of the financial system.

"It is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions," the three banks said in a joint statement.

Citigroup Inc said separately that it "stands ready to continue to access the discount window as client needs and market conditions warrant. Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients."

The discount window rate is 5.75 percent and the banks could have borrowed the funds more cheaply in the overnight Fed funds market where trading has been below the Fed's 5.25 percent target.

"Collectively, these banks are all taking extraordinary and economically disadvantageous actions in order to help the Fed to reduce the stigma of discount window borrowing, hoping smaller institutions will follow," Tony Crescenzi at Miller Tabak said.

"Of course, the banks are also acting in their self-interest by hoping that their actions will contribute to stability in the financial system," he said.

All four banks emphasized they have access to other, cheaper funds. But analysts said their borrowing through the central bank's discount window may allow others to follow.

"The psychology is, if a bank needs to borrow from the discount window, and they think there's a stigma attached to it, they can say, `Citi has done it, too,'" said Robert Albertson, chief strategist at Sandler O'Neill in New York.

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