[an error occurred while processing this directive]
BBC News
watch One-Minute World News
Last Updated: Thursday, 23 August 2007, 13:08 GMT 14:08 UK
Fed lending to ease credit woes
US houses
There has been a surge in job cuts across the housing sector
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.

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 market stability.

A rise in high-risk mortgage defaults has prompted fears that lenders would limit credit lines to all borrowers.

Stigma

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.

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.

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-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.

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.

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.

Countrywide Financial
Some investors see opportunities in the recent turmoil

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.

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 defaults

Job 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.

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 in 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.

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.


SEE ALSO
Q&A: Sub-prime lending
14 Mar 07 |  Business
US mortgage firm gets $2bn boost
23 Aug 07 |  Business
Surge in US home repossessions
21 Aug 07 |  Business
'Job cuts' at US mortgage lender
20 Aug 07 |  Business
Top US lender 'risks bankruptcy'
15 Aug 07 |  Business
Wall St hit by home payment fears
13 Mar 07 |  Business
US probes sub-prime mortgage firm
13 Mar 07 |  Business

RELATED INTERNET LINKS
The BBC is not responsible for the content of external internet sites



FEATURES, VIEWS, ANALYSIS
Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit

PRODUCTS & SERVICES

Americas Africa Europe Middle East South Asia Asia Pacific