Banks Borrow Heavily from Fed

Four major New York banks borrowed a whopping $3.14 billion from the Federal Reserve Wednesday night after a sudden shortage of reserves sent the federal funds rate soaring to 30%.

The amount of borrowing was revealed late Thursday afternoon. The initial reaction was that it was caused by last-minute loan requests by securities dealers, rather than by funding problems at any bank. Citicorp, which has been plagued recently by speculation about its solvency, told Reuters it had not borrowed from the Fed Wednesday.

The last time discount window borrowings from the Federal Reserve Bank of New York were so high was a few months ago, a spokesman said.

Heavy Buyers in N.Y.

New York banks were heavy buyers of fed funds from other institutions late Wednesday afternoon, market sources said. Citicorp, Bankers Trust New York Corp., Chemical Banking Corp., and Bank of New York Corp. were all said to be snapping up fed funds at high rates.

The rate was driven up partly by unexpectedly strong demand for dealer loans, market sources said. Securities dealers that wanted to finance their holdings found the rates on repurchase agreements - their customary funding mechanism - unpalatably high, and they turned to banks to obtain short-term loans instead. That in turn drove up banks' demand for fed funds, prompting the rate rise.

Separately, borrowings from the Atlanta Fed on Wednesday were $127 million, down from $137 million the week before. Southeast Banking Corp., a troubled company based in Miami, has borrowed from the Atlanta Fed in a possible sign of liquidity problems, sources said previously.

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