Largest Banks Borrow $500M Each From Fed
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The four largest American banks each borrowed $500 million from the Federal Reserve’s discount window on behalf of clients after the central bank cut the interest rate it charges and encouraged lenders to use the facility.
The transactions were “intended to display the effectiveness” of the discount window, JPMorgan Chase & Co., Bank of America Corp., and Wachovia Corp. said in a joint statement. Citigroup Inc. said in a separate statement that it “stands ready to continue to access the discount window as client needs and market conditions warrant.”
The central bank has been seeking help from the nation’s largest lenders to alleviate a credit crunch that threatens to slow economic growth and worsen the housing recession. Hours after reducing the discount rate on August 17, the president of the New York Fed, Timothy Geithner, convened a conference call with bank executives to ask them to tap the facility.
“From the Fed’s point of view, liquidity is being provided,” the chief economist at Charlotte, N. C.-based Wachovia, John Silvia, said. “The banks are going along and showing some support. They are working together. It is a calming influence, absolutely.”
The central bank on August 17 cut the so-called discount rate half a percentage point to 5.75% to direct more cash to companies starved for short-term financing. The Fed wants to avoid resorting to an emergency reduction in the benchmark federal funds rate that would ease monetary policy before the scheduled September 18 meeting of policy makers.
Banks were initially reluctant to use the discount window to obtain funds that could be used to finance securities for customers because of the risk that they would wind up owning the securities if clients defaulted, the head of American interest-rate strategy at Credit Suisse in New York, Dominic Konstam, said.
“That’s drawn a lot of ire from the likes of Senator Dodd and presumably” the chairman of the Fed, Ben Bernanke, Mr. Konstam added. “Now banks are being told to pass through the benefits to the leveraged community.”
A spokesman for Geithner, Calvin Mitchell, declined to comment.
The chairman of the Senate Banking Committee, Senator Dodd, yesterday met with Mr. Bernanke and Treasury Secretary Henry Paulson in Washington. In an interview after the meeting, the Mr. Dodd said banks should be doing more to bolster confidence in financial markets. He said he sensed Mr. Bernanke “didn’t totally disagree.”
