Aug. 22 (Bloomberg) -- The four largest U.S. banks each borrowed $500 million from the Federal Reserve to help ease a credit crunch that's threatening to slow economic growth and worsen the housing recession.

Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp. said they used the Fed's so-called discount window five days after the central bank lowered the interest rate it charges banks and encouraged them to tap the resource.

All four companies, which have access to cheaper funds, said they were borrowing from the Fed as an incentive for financial institutions that need the money more to do the same. Hours after policy makers reduced the discount rate to 5.75 percent on Aug. 17, New York Fed President Timothy Geithner held a conference call with bank executives, asking them to use the window.

``These banks are all taking extraordinary and economically disadvantageous actions in order to help the Fed,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. LLC in New York. ``The banks are also acting in their self interest by hoping their actions will contribute to stability in the financial system.''

Citibank, based in New York, said in a statement that it borrowed $500 million on behalf of unnamed clients even though it ``has substantial liquidity and widespread borrowing capacity.''

Citigroup and other banks can borrow from each other at the overnight federal funds rate, which policy makers have held at 5.25 percent for the past year. The interest rate on 30-day commercial paper for financial companies is about 5.24 percent, according to the Fed.

`Leadership Role'

Bank of America and Wachovia, both based in Charlotte, North Carolina, joined New York-based JPMorgan in a separate statement in which they said the transactions were intended to ``take a leadership role in demonstrating the potential value'' of the discount window to other companies.

The central bank lowered the discount rate half a percentage point to direct more cash to companies starved for short-term financing.

H&R Block Inc., the biggest U.S. tax preparer, said today it was forced to resort to bank credit lines twice in the past week after its usual source of short-term financing, the commercial paper market, began drying up. Countrywide Financial Corp., the largest U.S. mortgage lender, drew down $11.5 billion from its credit lines last week, a day after Merrill Lynch & Co. suggested the Calabasas, California-based lender may face bankruptcy.

Monetary Policy

The Fed wants to avoid resorting to an emergency reduction in the benchmark federal funds rate that would ease monetary policy before the scheduled Sept. 18 meeting of policy makers.

Christopher Dodd, chairman of the Senate Banking Committee, yesterday met with Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson in Washington. In an interview after the meeting, the Connecticut Democrat said banks should be doing more to bolster confidence in financial markets. Dodd said he sensed Bernanke ``didn't totally disagree.''

Banks were initially reluctant to use the discount window to finance securities for customers because of the risk that the lenders would wind up owning the investments if clients defaulted, said Dominic Konstam, head of U.S. interest-rate strategy at Credit Suisse in New York.

``That's drawn a lot of ire from the likes of Senator Dodd and presumably'' Bernanke, Konstam said. ``Now banks are being told to pass through the benefits to the leveraged community.''

`Sign of Strength'

Calvin Mitchell, a spokesman for Geithner at the New York Fed, declined to comment. Geithner said on the conference call last week that using the discount window would be a ``sign of strength.''

``As much as the Federal Reserve says coming to the window is a sign of strength, I really don't think so,'' said fund manager Michael Cheah of AIG SunAmerica Asset Management Corp. in Jersey City. ``This is not a good thing. I take it as a sign things are getting worse.''

Citigroup rose 37 cents to $48.43 in composite trading on the New York Stock Exchange at 4 p.m., and Bank of America gained 35 cents to $51.65. JPMorgan dropped 20 cents to $46, while Wachovia climbed 46 cents to $49.70.

Robert Diamond, president of Barclays Plc, the U.K.'s third- largest bank, said the ``big question'' is how much lenders continue using the discount window.

``It's a question of confidence,'' he said in an interview. ``We're seeing some good initial signs, but it was and continues to be a quite serious dislocation.''

The Fed will release total weekly borrowing from the discount window tomorrow at 4:30 p.m. Washington time.

To contact the reporter on this story: Joseph N. DiStefano in New York at jdistef@bloomberg.net.

Last Updated: August 22, 2007 16:41 EDT