August 23, 2007 / 12:04 AM / 10 years ago

Top international banks tap Fed discount window

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

U.S. shares rose after the moves, as the banks’ borrowing signaled battered credit markets may start to heal. Stocks in the finance sector 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, Germany’s Deutsche Bank JPMorgan Chase & Co, and Wachovia Corp said they did it for the sake of the financial system. All five banks emphasized they have access to other, cheaper funds.

With the four largest U.S. banks and a major international bank 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 Wednesday it is shutting down its BNC Mortgage Corp subprime lending unit and firing the business’s 1,200 employees. More than 4,000 layoffs in the mortgage sector were announced on Wednesday.

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

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.

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

On Wednesday, Bank of America Corp said it invested $2 billion in Countrywide Financial Corp, adding it hoped the move would be a step toward normalizing the mortgage market.

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.

Since 2003, borrowing from the discount window has not required 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 Friday to borrow from the Fed. Deutsche Bank did so late last week, it said.

On Wednesday, Bank of America, Citi, JPMorgan Chase and Wachovia Corp said they each borrowed $500 million. Deutsche Bank did not disclose how much it borrowed.

The banks must post collateral when they borrow from the Federal Reserve’s discount window, but it was not clear which types of loans or securities the banks used.

The Dow Jones industrial average rose 145.27 points, to close up 1.11 percent, while the Standard & Poor’s 500 index closed up 1.17 percent.

Additional reporting by Lucia Mutikani and Richard Leong

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