Central banks increase liquidity in markets to ease crunch
©AFP - Karen Bleier
WASHINGTON- In a fresh effort to ease a global credit squeeze, the US Federal Reserve acted Tuesday in concert with other central banks to pump hundreds of billions of dollars of liquidity into financial markets.
One of the initiatives announced by the Fed is a new auction program for commercial banks and brokerages, which will be able to swap thinly traded mortgage securities and other collateral for safer Treasury obligations.
It was the latest in a series of steps to help get credit flowing in the global financial system, which has been gridlocked by concerns about market turmoil linked to a collapse in US real estate securities.
The squeeze had spread to various institutions that are imperiled by a frozen market for many types of securities.
The Fed said it was offering 200 billion dollars in a new Term Securities Lending Facility auction, with a term of 28 days instead of overnight under an existing program.
This allows primary dealers, including commercial banks and securities brokers, to obtain Treasury securities by pledging collateral such as mortgage-backed securities and other debt. Auctions will be held on a weekly basis, beginning on March 27.
The Fed also said it has authorized increases in its existing temporary reciprocal currency arrangements or swap lines with the European Central Bank and the Swiss National Bank. The Fed will provide up to 30 billion dollars to the ECN and six billion to the SNB.
The move was coordinated with the ECB and SNB along with the Bank of Canada and Bank of England. Each of the central banks "are announcing specific measures" to deal with the liquidity crunch in the global system, according to a Fed statement.
The new lending auction "is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally," the Fed said in a statement.
©AFP/File - Adrian Dennis
The Fed action is designed to get more funds to banks hit by the credit crunch and thus cautious about interbank loans. By coordinating with other global central banks, the move will help provide dollars to overseas banks.
The latest action expanded an initiative announced by the Fed in December to create a Term Auction Facility (TAF) that allows commercial banks to bid for loans without the stigma of using the Fed's discount rate.
The Fed just last week boosted the size of the TAF to 100 billion dollars and announced repurchase transactions worth another 100 billion dollars to help get credit moving.
Analysts said this could help get cash to institutions that need it.
"The Fed is now getting creative with solutions to the credit crunch," said Andrew Busch, analyst at BMO Capital Markets.
"The market can now provide to the Fed the stuff that they don't want ... (such as federal agency mortgage-backed securities) ... for the stuff they want (US Treasury securities)."
Stephen Gallagher, economist at Societe Generale, said the move is aimed at helping banks stuck with mortgage securities that cannot easily be traded.
The moves offer "liquidity to the mortgage security sector while limiting the overall amount of reserves in the banking system to maintain the federal funds rate target," Gallagher said.
Robert Brusca at FAO Economics said the Fed announcement "broadens the asset classes it is dealing with for its dealer financings and extends credit under swap line arrangements with foreign central banks."
The European Central Bank said Tuesday it would continue to offer US dollar funding to eurozone banks, the third time it had done so in conjunction with the Federal Reserve in a new operation with a value of 15 billion dollars (9.8 billion euros).
In Zurch, the Swiss National Bank said it would inject 6.0 billion dollars into the financial system.
The Bank of Japan said it "welcomes these measures and hopes that they will contribute to maintaining the functioning of the international financial markets."
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