August 22, 2007 / 5:14 PM / 12 years ago

Top four banks tap Fed discount window

NEW YORK (Reuters) - Citigroup , Bank of America and other top banks took the rare step of borrowing $2 billion from the U.S. Federal Reserve on Wednesday, in a bid to reassure markets and remove the stigma associated with getting financing from the central bank.

People walk past a Citibank branch in New York February 17, 2007. The four largest U.S. banks, led by Citigroup and Bank of America Corp., took the unusual step of borrowing $2 billion directly from the Federal Reserve on Wednesday, as the Fed tries to stabilize tempestuous financial markets by adding money to the banking system. REUTERS/Keith Bedford

U.S. shares rose after the move, as the banks’ moves signaled that battered credit markets may start to heal, though bank stocks were mixed amid lingering concern about mortgages.

Borrowing money directly from the Fed has historically been seen as a sign of weakness, but Bank of America, JPMorgan Chase & Co, and Wachovia Corp said they did it for the sake of the financial system. All four banks emphasized they have access to other, cheaper funds.

With the four largest U.S. having banks having borrowed from the Fed through the central bank’s discount window, others may be more willing to follow, analysts said.

“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.

Central banks throughout the world are pumping liquidity into the global financial system as big losses in U.S. subprime mortgages make credit harder to come by in markets ranging from junk bonds to commercial paper.

Difficulties in the subprime sector are not over yet. Lehman Brothers Holdings Inc said on Wednesday it is shutting down its BNC Mortgage Corp subprime lending unit and firing its 1,200 employees.

Tighter credit is raising questions about future economic growth, which has pulled stock prices down and lifted bond prices in recent weeks.

On Friday, the Fed tried to assuage fears by cutting the so-called discount rate, the rate at which banks borrow directly from the central bank. The Fed also signaled it was willing to take more dramatic action to cushion the U.S. economy.

The Standard & Poor’s 500 index has risen more than 3.5 percent since the Friday morning discount rate cut.

SIGN OF WEAKNESS

Banks often hesitate to borrow money from the Fed’s discount window, because for a long time it was a move taken by banks in trouble, and required them to submit to additional regulatory oversight.

Borrowing from the discount window no longer requires greater federal supervision, but the stigma remains, said Richard DeKaser, chief economist at National City Corp. in Cleveland.

“The Fed is struggling mightily to change that perception,” DeKaser said.

Timothy Geithner, president of the Federal Reserve Bank of New York, encouraged banks in a call on Friday to borrow from the Fed. Deutsche Bank did so late last week, the Financial Times reported on Monday.

On Wednesday, the top four banks said they each borrowed $500 million. Banks must post collateral when they borrow from the Federal Reserve’s discount window, but it was not clear how the banks secured their loans.

A guard makes his rounds outside the Federal Reserve in Washington August 20, 2007. Bank of America Corp, JPMorgan Chase & Co and Wachovia Corp on Wednesday said they each borrowed $500 million at the discount window facility announced by the Federal Reserve last week. REUTERS/Kevin Lamarque

The Dow Jones industrial average .DJI> rose by 145.27 points, or 1.11 percent in later afternoon trading, while the Standard & Poor’s financial index .GSPF> turned modestly positive, closing up 1.17 percent.

(Additional reporting by Lucia Mutikani and Richard Leong)

Reporting by Dan Wilchins

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