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Fed lending to ease credit woes Fed lending to ease credit woes
(20 minutes later)
A group of US and European banks have borrowed $2bn (£1bn) from the Federal Reserve to ease credit concerns, following recent market turmoil.A group of US and European banks have borrowed $2bn (£1bn) from the Federal Reserve to ease credit concerns, following recent market turmoil.
By taking the unusual step, Bank of America, Citigroup and Germany's Deutsche Bank among others, aim to improve access to available credit.By taking the unusual step, Bank of America, Citigroup and Germany's Deutsche Bank among others, aim to improve access to available credit.
But the also highlights the highly fragile state of credit markets. But the move also highlights the highly fragile state of credit markets.
Last week the Federal Reserve cut the rate at which it loans to banks in order to ensure orderly markets. Last week the Federal Reserve cut the rate at which it loans to banks in order to ensure market stability.
A rise in high-risk mortgage defaults has prompted fears that lenders would limit credit lines to all borrowers.A rise in high-risk mortgage defaults has prompted fears that lenders would limit credit lines to all borrowers.
StigmaStigma
The four US large banks borrowing directly from the Federal Reserve - Citibank, Bank of America as well as JP Morgan Chase and Wachovia - took $500m each.The four US large banks borrowing directly from the Federal Reserve - Citibank, Bank of America as well as JP Morgan Chase and Wachovia - took $500m each.
Deutsche Bank did not disclose how much it had taken.Deutsche Bank did not disclose how much it had taken.
Traditionally there has been a stigma associated with borrowing directly from the Fed on the grounds that it was a last resort.Traditionally there has been a stigma associated with borrowing directly from the Fed on the grounds that it was a last resort.
But the banks stressed that this was not the case.But the banks stressed that this was not the case.
Robert Albertson, chief strategist at Sandler O'Neill in New York said the theory is that once some of the big names start borrowing it makes it easier for others to follow suit.Robert Albertson, chief strategist at Sandler O'Neill in New York said the theory is that once some of the big names start borrowing it makes it easier for others to follow suit.
High-riskHigh-risk
Recent market turmoil had been triggered by problems in the US sub-prime mortgage sector - those made to borrowers with chequered or no credit history.Recent market turmoil had been triggered by problems in the US sub-prime mortgage sector - those made to borrowers with chequered or no credit history.
To counter their risky status, they are charged higher rates of interest.To counter their risky status, they are charged higher rates of interest.
The market for these loans expanded, notably when the US housing market boomed and poor people started taking out loans for homes.The market for these loans expanded, notably when the US housing market boomed and poor people started taking out loans for homes.
But things started to turn sour when the housing market cooled, leading to a glut of property, and a series of interest rate rises made the monthly repayments overly expensive.But things started to turn sour when the housing market cooled, leading to a glut of property, and a series of interest rate rises made the monthly repayments overly expensive.
Some investors see opportunities in the recent turmoilSome investors see opportunities in the recent turmoil
Unable to meet payments, borrowers started to default on these loans.Unable to meet payments, borrowers started to default on these loans.
Once lenders become reluctant to loan money, obtaining credit becomes harder and often more expensive, which is turn threatens to hamper wider economic growth.Once lenders become reluctant to loan money, obtaining credit becomes harder and often more expensive, which is turn threatens to hamper wider economic growth.
According to the Federal Deposit Insurance Corporation, defaults on loans at US banks rose 36% to $66.9bn in the second quarter.According to the Federal Deposit Insurance Corporation, defaults on loans at US banks rose 36% to $66.9bn in the second quarter.
This marks the largest quarterly rise in 17 years, and stems mainly from mortgage defaultsThis marks the largest quarterly rise in 17 years, and stems mainly from mortgage defaults
Job lossesJob losses
As the problems in the sub-prime sector have become apparent, financial institutions that invested heavily in the sector have taken steps to cut their losses.As the problems in the sub-prime sector have become apparent, financial institutions that invested heavily in the sector have taken steps to cut their losses.
Most recently US investment bank Lehman Brothers announced it was shutting down its BNC Mortgage sub-prime lending unit as well as cutting 1,200 jobs.Most recently US investment bank Lehman Brothers announced it was shutting down its BNC Mortgage sub-prime lending unit as well as cutting 1,200 jobs.
Accredited Home Lenders said it would close nearly all of its retail arm, getting rid of 1,600 jobs and the firm is no longer taking loan applications.Accredited Home Lenders said it would close nearly all of its retail arm, getting rid of 1,600 jobs and the firm is no longer taking loan applications.
Meanwhile the biggest US mortgage lender, Countrywide Financial, which strongly invested sub-prime loans, has been cutting jobs and seen its share price plummet.Meanwhile the biggest US mortgage lender, Countrywide Financial, which strongly invested sub-prime loans, has been cutting jobs and seen its share price plummet.
And more broadly speaking, Jonathan Said, from the Centre for Economics and Business Research, told the BBC that up to 5,000 jobs may go in the UK's City following the recent market volatility.And more broadly speaking, Jonathan Said, from the Centre for Economics and Business Research, told the BBC that up to 5,000 jobs may go in the UK's City following the recent market volatility.
But amid the turmoil, banks are also seeking opportunities while stocks are cheap and many investors are risk-averse.But amid the turmoil, banks are also seeking opportunities while stocks are cheap and many investors are risk-averse.
Bank of America has invested $2bn (£1bn) to buy a stake in Countrywide Financial, saying the firm's assets were undervalued.Bank of America has invested $2bn (£1bn) to buy a stake in Countrywide Financial, saying the firm's assets were undervalued.