The nation's four biggest banks each took down $500 million in short-term financing from the Federal Reserve's discount window, aiming to make a show of confidence amid a spreading credit crunch.
said just after noon that it borrowed $500 million for clients from the Federal Reserve Bank of New York. Minutes later,
Bank of America
said in a joint statement that they were borrowing from the Fed as well.
The move comes just days after the Fed cut its rate on discount-window borrowings to 5.75% from 6.25%. The discount window is the Fed's method of serving as the lender of last resort during times of financial stress.
The news comes as investors worry about the effect of the subprime mortgage mess on the health of the nation's debt markets. Investors fled the once-robust mortgage-backed securities markets this summer after delinquencies and defaults soared on loans to homebuyers with poor credit histories. Since then, other credit markets, such as that for asset-backed commercial paper, have frozen up as well.
While Citi specified that it was borrowing on behalf of unnamed clients, the other banks stressed that they took their loans as a show of confidence in the Fed's stewardship of the economy.
"While JPMorgan Chase, Bank of America and Wachovia each have substantial liquidity and the capacity to borrow money elsewhere on more favorable terms," the joint statement read, "the companies believe 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."
Likewise, Citi assured investors that it "has substantial liquidity and widespread borrowing capacity," but said 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 big banks' comments echo a widely noted historical precedent from
1907, when J.P. Morgan broke a banking panic by putting together a group that used its own capital to shore up faltering banks.
The freeze-up of the mortgage markets has sent big stand-alone lenders such as
scurrying to line up new sources of funds. Other lenders, such as
, have had to severely cut back their operations as demand for nonprime mortgages plunges.
Observers say the Fed may have cut its discount rate, rather than the more widely watched fed funds overnight bank-lending rate, in hopes of stimulating the flow of funds to borrowers that have been locked out of securities markets such as the one for commercial paper.
was the first big financial institution to tap the discount window, the
reported earlier this week.