Central Banks Step in to Attack Credit Crisis


The world’s central banks on Wednesday unleashed a co-ordinated assault on the liquidity squeeze in global capital markets. The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, and the Swiss National Bank all announced measures to attack the liquidity crisis.

The Fed said it was creating a temporary credit auction facility, and entering into foreign exchange swap agreements with the ECB and the Swiss to tackle the shortage of dollar funds in Europe.

The move comes after several weeks of mounting tension in the global money markets, due to a combination of normal, year-end funding pressures and deepening gloom among banks about the impact of the losses on subprime-linked securities.

Until recently, some bankers had hoped that these money market pressures would be short-lived. However, in recent days some of the money market indicators have started to move in ways that suggest banks are now worried that funding problems will last into the New Year, or even the summer. This appears to have prompted the central banks to launch their joint action - a step which is unprecedented in terms of the degree of co-ordination that it implies between the leading central banks.

The issue of co-ordination between central banks has become particularly important in recent months, since the most severe funding problems have often occurred in the dollar markets - but many of the victims of these pressures have been European institutions, which have not always had access to the dollar market on the same terms as US banks.

This pattern prompted suggestions in the summer that the ECB should conduct a currency swap with the Fed, but this was rejected by the ECB at this time as an unnecessary move.

Wall Street welcomed the news. The Dow Jones Industrial Average opened up 204 points at 13,637. The yen fell sharply against a range of currencies as traders bet that the banks’ move would help raise risk appetite and lead to a rejuvenation of the carry trade.

US Treasuries fell and yields rose as investors fled save havens and were poised to move back into equities.

In Europe, the FTSE 100 in London, which at one stage in the morning had been down more than 100 points, turned to the black with a gain of 35 points. Banking stocks, in particular, saw fresh demand, reversing earlier losses.

As part of the measures, the Fed will auction term funds to depository institutions against a wide variety of collateral that can be used to secure loans at the discount window.

The first auction under the programme will be $20bn in 28-day term funds on Monday, settling December 20, with a second auction of $20bn in 35-day funds scheduled for December 20, settling on December 27. Subsequent auctions are scheduled on January 14 and January 28.


Financial Times
12/12/2007 7:42:24 AM