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Banking crisis: Central banks pump billions in to ease the strain

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Larry Elliott,
London Guardian
Thursday, Sept 18, 2008

Today’s coordinated action is a response to the problems banks are facing when they seek to secure short-term funding in the money markets

The world’s leading central banks made a fresh attempt today to ease the growing stress in the world’s money markets, taking coordinated action to provide $180bn in extra liquidity to cash-strapped banks.

After the unwillingness of banks to lend to each other led to acute shortages of funds in short-term dollar markets, the Federal Reserve announced that the European Central Bank, the Bank of Japan, the Swiss National Bank, the Bank of Canada and the Bank of England would all provide extra funding in short-term US dollar markets. The Fed will lend other central banks dollars so that they can pump extra liquidity into markets in Europe, Asia and North America.

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The Fed said in a statement that the move was “designed to address the continued elevated pressures in US dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.”

Today’s coordinated action is a response to the problems banks are facing when they seek to secure short-term funding in the money markets. Up until the start of the credit crunch a year ago, financial institutions were able to borrow money at rates only slightly higher than the official interest rates set by central banks, but this process has become far more expensive since August 2007.

The funding crisis has become particularly acute in dollar markets this week following the collapse of Lehman Brothers, the takeover of Merrill Lynch and the nationalisation of insurance giant AIG.

In its share of the operation, the Bank of England will offer to lend each day US dollar funds overnight against eligible collateral, with the first auction of funds taking place today. “The amount offered in each repo operation will initially be $40bn”, the Bank said in a statement. “This amount will be reviewed on a regular basis, in consultation with the other central banks.”

This article was posted: Thursday, September 18, 2008 at 3:50 am

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