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The Reserve Bank has joined with central banks in other countries and intervened in a bid to increase liquidity in the crisis-hit banking system.
After saying that the bank had confidence in the system, a press release just published by the Reserve Bank outlines the new measures.
The Bank says it wants to facilitate the injection of funds into the banking system by accepting "bank paper" in its daily market operations.
"While bank paper is already eligible for use in our standing facility, it has not been accepted to date in the Bank's open market operations," said Deputy bank Governor Grant Spencer. "This measure should take some pressure off the FX swap market which is the usual channel for injecting Reserve Bank funds.
"It is our intention to offer longer terms than usual in our operations, up to six months, in order to help ease pressure at the short end of the market.
"Second, the Reserve Bank is intending to introduce a new facility which will make certain Asset Backed Securities (ABS) eligible as collateral in its domestic liquidity facilities. This is intended to further broaden the range of assets and institutions that have access to Reserve Bank liquidity. The proposed terms for this facility will be released separately and will be subject to industry consultation before they are finalised."
In addition, the Bank will soon be releasing a consultation document on a proposed revised policy for banks in regards to the management of their own liquidity and funding. This policy is aimed at ensuring that the banks are less vulnerable to future liquidity shocks and disruptions in global funding markets.
"While these measures will assist in promoting a more stable liquidity situation, the Reserve Bank retains full confidence in the underlying solvency of the New Zealand banking system," Spencer said.
Reserve Bank Governor Alan Bollard said disruptions in the US markets are reverberating around the world. New Zealand banks are not directly involved, although there are indirect adverse effects on liquidity in New Zealand's financial markets.
"Financial prices have become volatile and, with heightened uncertainty, investors are becoming more risk averse," Dr Bollard said. "While New Zealand will inevitably feel the effects of major financial shocks such as this, New Zealand banks are not involved in the sort of complex financial transactions that have caused significant losses in many of the large global institutions.
"However, as stated in the Bank's May Financial Stability Report, the New Zealand banks have seen a tightening in the availability of funding in global debt markets, on which they are relatively reliant. These pressures are exacerbated by recent events.
"There is no immediate problem, but the Reserve Bank always stands ready to support the liquidity of the New Zealand financial system," he said.
At 2.40pm, the NZSX-50 was up 55 points - a 1.7 per cent gain for the day to 3214.
News that the US government is considering a more comprehensive solution to the financial crisis than the current piecemeal approach spurred a furious late rally on Wall Street.
The early rise in this country comes after the New Zealand sharemarket plunged 3.4 per cent yesterday.
The international financial turmoil came closer to home yesterday when a British bank that has loaned about $3 billion to New Zealand businesses was swallowed in a $32 billion emergency takeover.
However, international central banks overnight pumped US$180 billion ($266 billion) into the world banking system and Wall St reacted positively by closing up sharply higher.
The British Government stepped in to help smooth the deal for HBOS to be bought by Lloyds TSB, amid fears of possible bankruptcy for HBOS and calamity for its 15 million savers.
Under the deal, HBOS's New Zealand and Australian operations could be sold and investments reviewed.
Wall Street rallied in a stunning late-session turnaround this morning, shooting higher and hurtling the Dow Jones industrials up 410 points following a report that the federal government might create an agency to absorb banks' bad debt.
The report also cooled investors' fervour for the safest types of investments like government debt.
Wall Street hoped a huge federal intervention could help financial institutions jettison bad mortgage debt and stop the drain on capital that has already taken down companies including Bear Stearns Cos. and Lehman Brothers Holdings Inc.
Worries about financial landmines on companies' books have essentially crippled parts of the world's financial markets in recent days and led to the intense volatility in the markets this week.
"It's going to take a lot of the bad debt off the balance sheets of these companies," said Scott Fullman at WJB Capital Group in New York of plans for a new agency.
"Bear markets are very sensitive to news. And on a scale of 1 to 10, this one is a 13," he said.
The Dow soared 410.03, or 3.86 per cent, to 11,019.69, surging 560 points from its low of the day, 10,459.44. It was the Dow's biggest percentage point gain since October 2002 but still leaves the index down about 400 points for the week after routs on Monday and Wednesday local time.
Oil shot up early in the day, moving back above US$100 as investors sought it as another haven. But crude fell back with the market's realization that the financial turmoil will likely exacerbate the drop in demand that has taken oil down sharply from its July record of US$147.27 a barrel.
The panic in global markets reached "historic intensity" yesterday, according to Britain's Financial Times.
"Barometers of financial stress hit record peaks across the world," it said."
So keen were investors to find a haven that they piled money into short-term US Treasury bills, even though they were offering only 0.02 per cent interest, the lowest rate since January 1941.
Share prices in New Zealand, Australia and throughout Asia fell sharply again yesterday.
The New Zealand market plunged 3.4 per cent - its worst one-day drop since November 5, 2002.
In Russia, the market remained closed after big drops in share prices on Wednesday.
The extraordinary moves by central banks in the US, the UK and elsewhere came after huge falls on stock markets and in US Treasury bond yields, a surge in the price of gold, reports that investment bank Morgan Stanley is looking for help after the collapse of Lehman Brothers, and uncertainty after the bail-out of US insurance giant AIG.
Harvard economics professor Kenneth Rogoff said America would need "very deep pockets" to fix the system.
"It is hard to imagine how the US Government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already - that is, an amount closer to US$1000 billion to US$2000 billion."
The Wall Street Journal said: "The US financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets."
In New Zealand, the merger of Lloyds TSB and HBOS has sparked talk that the combined company could sell HBOS Australia, which lends money to property and finance companies in New Zealand through its subsidiary, BOS International.
Those loans include $35 million helping to prop up consumer finance company Geneva, a $70 million loan to the failed Dominion Finance and a proposal to increase lending from $75 million to $150 million to help save Strategic Finance.
It has also made extensive loans to New Zealand property developers, including $151 million to Christchurch's Infinity Group for its Pegasus Town residential development expected to house 5000 people, and undisclosed loans thought to be more than $300 million each to retail property developer New Zealand Retail Property Group, the owner of Auckland's Milford, Westgate and Highpoint shopping centres and Landco, the developer of a new Mt Wellington subdivision.
Market commentator Arthur Lim said the HBOS takeover was a continuation of the "sorting out of the financial services sector".
"When the crisis broke last year, billions were pumped into the markets to no avail. They just staved off the day of reckoning.
"Merrill Lynch and HBOS are being acquired at prices that make acquisitions work."
A spokesman for HBOS Australia said he could not comment on what the buy-out would mean for the business, but as far as it was concerned it was "business as usual".
Pegasus Group spokeswoman Hetty van Hale said she did not believe its loan would be affected by the change in ownership.
Also closer to home, shares in Australian investment bank Macquarie plummeted 23 per cent in one day - from A$33.93 to A$26.05 - after ratings agency Standard and Poor's down-graded its outlook for the company from stable to negative.
- TAMSYN PARKER/AP/NZPA/HERALD ONLINE
