Central banks pumping billions into world financial system

NEW YORK:

Central banks in Europe and North America moved Wednesday to increase the amount of money they could lend to banks and to make it more readily available in an attempt to ease the credit squeeze.

It was the first time since the Sept. 11, 2001, terrorist attacks in New York and on the Pentagon that these central banks have coordinated their support of financial markets.

Stock markets rose in Europe and the Americas after the announcement by the U.S. Federal Reserve, the Bank of Canada, the European Central Bank, the Bank of England and the Swiss National Bank.

In the United States, the Standard & Poor's 500-stock index made up nearly half of its losses from Tuesday, when stocks fell after the Fed cut interest rates modestly, but then dipped, closing up 8.94 points at 1,486.59. The Dow Jones Stoxx 600, a broad measure of European markets, rose 1.20 points to close at 374.75.

Fed officials said the united move was an effort to improve financial markets, not a response to problems at any individual bank.

"This is not about particular financial institutions with particular problems," a senior Fed official said in a background briefing for reporters. "It is about market functioning."

Economists and market specialists welcomed the Fed's intervention but expressed some skepticism whether it would be enough to allay the biggest problems in the credit markets related to the sharp drop in the value of U.S. mortgage securities.

"We have a Fed now that seems to understand the liquidity problem of the marketplace," said William Gross, the chief investment officer of Pacific Investment Management, the bond management firm. "These measures, while limited in size and with limitations in acceptance of collateral, should certainly instill a measure of confidence to the private market."

Gross added, "Now it's up to the private market to gain a little confidence and turn a little macho and start performing on its own."

The move by the central banks should get more money to banks at interest rates lower than what they would have to pay if they borrowed at the Fed's discount window. The Fed will auction up to $40 billion in loans to banks at two auctions next week and undetermined additional amounts at two auctions in January.

The Fed also said it was making funds available to allow the European Central Bank to lend $20 billion and the Swiss National Bank to lend $4 billion to European banks that needed to borrow dollars.

In Frankfurt, the ECB said it would offer euro-zone banks as much as $20 billion to help cover their dollar-denominated liabilities.

"The general objective is to address elevated pressures in the short-term money market," said Lucas Papademos, an ECB vice president.

At its meeting Tuesday, the Fed lowered its target for the federal funds rate, the rate banks normally pay on overnight loans to each other, by a quarter point to 4.25 percent. It also lowered the discount rate, the rate at which the Fed will lend to banks on loans secured by virtually any collateral, by a quarter point, to 4.75 percent.

U.S. share prices fell late Tuesday after that announcement amid disappointment that a larger cut was not made. They recovered much of the losses Wednesday morning before giving up some of those gains.

Fed officials said the announcement of coordinated action had been in the works for some time but could not be announced Tuesday because the central banks wanted to make the announcement when all their markets were open.

"Market reaction yesterday had nothing to do with today's announcement," a senior Fed official said Wednesday. "This was a global effort among a number of central banks. We wanted to announce that together. We couldn't have announced that yesterday as Europe was closed" when the Fed announced its action.

The first auction of $20 billion was scheduled for next Monday, followed by another auction of $20 billion on Dec. 20. The third and fourth auctions will be on Jan. 14 and 28.

The Fed said that the new auction process should "help promote the efficient dissemination of liquidity" when other lines of credit were "under stress."

The experience gained from the four scheduled auctions would be "helpful in assessing the potential usefulness" of this new process to provide funds to U.S. banks, the central bank said.

Since the global credit crunch hit with force in August, central banks as well as the Federal Reserve have been injecting huge amounts of money into the banking system in an effort to keep credit flowing. Nonetheless, loans have been hard for many to obtain.

The auctions held by the Fed will set interest rates on borrowings by banks from the Fed. The banks will be able to post any collateral they wish, including illiquid securities such as collateralized debt obligations, as they now can do at the discount window. But while it often becomes known which banks borrow at the discount window, the auction procedures are designed to keep the identities of the borrowers secret.

"There is no reason to believe there would be stigma associated with the use of this facility," the senior Fed official said.

Papademos said the ECB hoped to reduce the difference between overnight loan rates and those for three- and six-month periods, which have remained stubbornly elevated as banks and other financial institutions have stepped up their cash hoarding toward the end of the year.

After relaxing somewhat in September and October following great turmoil in late summer, credit markets have grown tense since mid-November.

Demand for credit often runs higher toward year's end, but this year banks are also building up liquidity cushions to guard against further losses linked to the deteriorating U.S. mortgage market.

"The most positive aspect is that this is a new response to a problem that seemed to remain intractable," said Marco Annunziata, the chief economist at UniCredit. "It will probably not be the silver bullet, but it should allow us to move forward."

Carter Dougherty reported from Frankfurt. Vikas Bajaj contributed reporting from New York.