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Barclays and RBS set up Fed back-up

Business Materials 22 October 2007 05:18 (UTC +04:00)

Barclays and Royal Bank of Scotland have followed other international banks by arranging $30bn of facilities from the US Federal Reserve that could be used by customers hit by the credit squeeze.

The banks said it was a back-up in case clients needed to borrow money against assets including mortgage-backed securities.

In August, the Fed cut the discount rate at which it lent to banks and encouraged them to make use of the "discount window" to help restore market confidence that the banks would continue to be able to lend.

Four leading banks, Citigroup, Bank of America, JPMorgan Chase and Deutsche Bank, have all set up similar facilities with the Fed and have borrowed small amounts to show support for its efforts.

The Fed has given Barclays and RBS permission to borrow up to $20bn and $10bn respectively.

The facility would be used to cover the banks' extension of credit to clients "in need of short-term liquidity to finance their holdings of securities and certain other assets", the Fed said in letters to the banks.

In the case of RBS, the Fed said the assets could include "residential and commercial mortgage loans and mortgage-backed securities, asset-backed securities, commercial paper and other structured products".

Some investment vehicles are struggling to finance holdings of mortgage-backed securities through the issue of commercial paper and a group of US banks are putting together a $75bn superfund to buy some of their assets.

Barclays and RBS have not been involved in the detailed discussions of this plan and these facilities are unrelated.

RBS said: "Major banks such as ourselves and Citigroup and JPMorgan are encouraged by the Fed to have this kind of facility in place."

People close to the banks said neither had any current intention of using the facilities.

Barclays said: "This secures another potential source of funding should our US clients seek it."

Observers believe there are likely to be other such applications by banks that are active in the US repo markets, where they lend money to clients against holdings of securities.

"Who knows what the demands are going to be and where the respective rates are going to be in the coming months," said one banker.

Banks have historically been reluctant to borrow from the Fed because of concern that it would be seen as a sign of financial weakness. But the Fed has stressed that there will be no stigma attached to use of the discount window at the moment.

The Fed made its moves amid mounting concern about the banks' willingness to lend to each other because of their uncertainty about how much debt was going to come on to their balance sheets as a result of the credit squeeze. ( FT )

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