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Central banks around the globe banded together yesterday to make it easier for stressed banks to borrow money in the midst of a credit crunch that threatens to knock the United States economy into recession and slow growth worldwide.
The steps, announced jointly by the US Federal Reserve, the European Central Bank and the central banks of Canada, England and Switzerland, were aimed at tamping down a financial crisis that erupted in the northern summer when record housing foreclosures left banks leery of lending.
The Bank of Japan and Sweden's Riksbank also said they would support the plan.
"This is the biggest act of global economic co-operation since September 11," said Sherry Cooper, chief economist for BMO Capital Markets in Toronto, referring to a global credit easing launched after the World Trade Centre attacks.
The news initially brought a wave of relief to financial markets after sharp declines the previous day when the Fed cut interest rates modestly and dashed hopes of a more aggressive strike.
But by early Wednesday afternoon (US time), stocks cut their sharp initial gains as investors weighed the implications of the proposed plan.
The Dow industrials were up 81 points in mid-afternoon after jumping 250 points initially and bond prices edged lower.
The Fed, in announcing the proposal, said it would launch a "temporary term auction facility" that banks could use to secure loans at its discount window.
The move expands the number and reach of banks allowed to borrow money to meet temporary shortages of funds.
The US central bank announced two auctions of up to US$20 billion each in short-term funding next week, with others raising unspecified amounts to follow in January.
"This facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress," the Fed said.
A Fed official said the auction system might erase some of the stigma associated with borrowing at the discount window by providing a cloak of anonymity.
The move also addresses raising US dollars for foreign investors with stressed American assets.
The US central bank did so by opening foreign exchange swaps for up to US$20 billion with the European Central Bank and up to US$4 billion with the Swiss National Bank.
The ECB said it would use the swap facility to offer European institutions US dollar funding in any cases where European financial firms encountered "elevated pressures" in short-term credit markets.
"In effect, the Fed will lend US dollars to these central banks, which can then lend them to commercial banks in Europe," Wachovia Corp economist Jay Bryson said in a research note.
Rising defaults on US sub-prime mortgages set in train a global tightening of credit this summer as banks, worried over possible repayment failures, stopped lending to each other.
Like the Fed, the Bank of Canada said it would launch a temporary auction facility. It also said it would expand the list of securities eligible as collateral for central bank loans.
The Bank of England said it would offer three-month loans against a wider range of collateral.
The moves come after interest rate cuts by the Fed, the Bank of Canada and the Bank of England failed to soothe worries that banks would continue to pull back from lending.
The Fed on Tuesday cut the benchmark federal funds rate a quarter-percentage point to 4.25 per cent and trimmed the discount rate charged on direct Fed loans banks for loans by the same amount.
Fed and ECB officials said the steps had been under consideration for some time.
A senior Fed official said He said the announcements were not in response to market disappointment with Fed's rate cut decision on Tuesday.
- REUTERS
