ECB, Fed pump dollars into money markets

September 18, 2008 5:16:59 AM PDT
The world's major central banks banded together on Thursday to inject as much as $180 billion into money markets in a bid to stave off the growing global financial crisis. The European Central Bank said that it had joined with the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank to pump more short-term dollar liquidity into the financial system.

Credit markets have tightened since Monday after the weekend collapse of investment house Lehman Brothers Holdings Inc., and central banks already provided billions Monday and Tuesday in hopes of turning the tide and to keep fearful banks from hoarding cash.

In a statement, the Fed said it had authorized a $180 billion expansion of swap lines, or reciprocal currency arrangements, with the other central banks, including amounts up to $110 billion by the ECB and up to $27 million by the Swiss National Bank.

The Fed also said new swap facilities had been authorized with the Bank of Japan for as much as $60 billion; $40 billion for the Bank of England and $10 billion for the Bank of Canada.

"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," the Fed said in a statement on its Web site.

Michael Schubert, analyst with Commerzbank AG, said the move was done in part to help banks that may not have direct access to the Fed.

"Firstly, some euro-area banks have no direct access to the Fed. Secondly, euro-area auctions for (U.S. dollars) provide better timing for euro-area banks," he said.

The ECB, which oversees the 15-nation euro zone, plans to provide as much as $40 billion to cash-starved banks, money that is being provided to it by the Federal Reserve swap line. The one-day operation opened for bids Thursday morning. The bank is also going to increase a 28-day tender operation the to $25 billion and an 84-day tender to $15 billion.

"Overall, the dollar funding operations conducted by the Eurosystem could reach an outstanding amount of $110 billion," the ECB said in a statement.

The Bank of England said it would inject $40 billion as part of the coordinated effort. So far, the London-based bank has provided a total of 25 billion pounds ($44.8 billion) to markets since Monday.

In Tokyo, the Bank of Japan said Thursday it has also concluded a U.S. dollar swap agreement worth $60 billion with the Federal Reserve to supply U.S. dollar funds to market participants in Japan. "The bank will continue to strive to maintain market stability through money market operations," it said in a statement.

In Washington, the Fed has pumped $70 billion into the nation's financial system to help ease credit stresses. In emergency sessions over the weekend, the Fed expanded its loan programs to Wall Street firms, part of an ongoing effort to get credit flowing more freely. On Wednesday, the U.S. Treasury Department said that in an effort to help the Fed deal with unprecedented borrowing needs resulting from the current credit crisis, it will begin auctioning debt for the central bank.

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On the Net:

Federal Reserve: http://www.federalreserve.gov

Bank of Canada: http://www.bank-banque-canada.ca

Bank of England: http://www.bankofengland.co.uk

Bank of Japan: http://www.boj.or.jp

Swiss National Bank: http://www.snb.ch


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