American Express, the largest US credit-card company by purchases, and the fourth largest US credit card issuer, said it has received approval from the US Federal Reserve to function as a commercial bank, a development that will cut its borrowing cost and give it access to the Treasury's $700 billion 'Troubled Assets Relief Program', as it had piled mountains of credit card defaults and found trouble sourcing for cheap funds.

The sudden move has surprised many as AmEx had always maintained that it would not convert itself into a bank although it had kept the option open.

The Federal Reserve acted with speed and used its emergency powers to grant AmEx the licence within 20 days, a process which usually takes up to 45 days, as it realised the company's urgency to avail of the government investment programme which was due to expire on 14 November.

In a statement, the Fed said the licence was granted quickly because of the ''emergency conditions'' and ''the unusual and exigent circumstances'' in the financial industry.

Another reason for the Fed to hasten the approval in spite of AmEx's retail banking experience being very low, was that AmEx had $127 billion in total assets and only $7.2 billion in retail deposits, a sign that the company could buckle down any time.

"Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programmes the federal government has introduced or may introduce to support US financial institutions," AnEx chief executive Kenneth Chenault said in a statement.

AmEx has been hit hard by the collapse of the housing market and economic slowdown which in turn forced companies laying off thousands of workers all over the US.

These massive layoffs have resulted in consumers cutting down on spending as well as massive defaults in credit card repayments with AmexCo reporting last month a 24 per cent drop in third quarter profits and a 50 per cent rise in the provision for credit losses.

Operating in a single line of business, AmEx depended on bundling its credit card loans into securities and selling them to investors, but in the wake of the housing crisis investors shunned these securities thereby drying up the credit card loan securities market completely.

Last month it announced 7,000 job cuts which work out to 10 per cent of its workforce in order to save $1.8 billion in 2009. (See: Amex to cut 7,000 jobs amidst rising defaults)

AmEx also outlined plans to reduce operating costs by cutting expenses for consulting and other professional services, travel and entertainment, and general overheads in a bid to save the company approximately $125 million next year.

October month was unpleasant in many ways as the number of unemployed people increased in the US by 6,03,000 to 10.1 million in October (See: US unemployment rate hits a 14-year high at 6.5 per cent) and it also was the first month since 1993 that card companies were unable to sell bonds backed by customer payments.

Adding to its difficulties, its main sources of funding had grown more expensive as secured and unsecured bond markets had shut down but operating as a bank holding company, AmEx will now be able to issue bonds that are government guaranteed through the end of June 2012, and also avail funds from the Treasury's $700 billion 'Troubled Assets Relief Program'

Although bank holding companies can avail of low cost Fed lending facilities, it has to adhere to the strict regulation and capital requirements demanded by the regulators.

It is also in a position to buy other banks as well as take deposits from consumers and companies, which anyway is the cheapest way of sourcing funds.

American Express currently operates a small commercial bank, known as ''the American Express Centurion Bank'' which is under the supervision of the Federal regulators.

GMAC, the financial arm of General Motors has also applied for a licence to become a bank holding company on the hope that it could also dip into the Fed funds.

In September, Goldman Sachs and Morgan Stanley, the last two investment banks left standing in the US, converted to bank holding companies. (See: Goldman Sachs, Morgan Stanley surrender investment bank status)