Central Banks Intervene in Money Markets
13 December 2007
An attempt was made on Wednesday by European and North American Central Banks to collaborate in order to reduce the strain of the credit squeeze in the global financial markets. The Bank of England, European Central Bank, Swiss National Bank, US Federal Reserve and the Bank of Canada announced steps to inject in excess of £50bn into the global money markets in an unprecedented course of action.
The Fed announced it would implement a new credit auction facility this month; whereby it would lend cash to commercial banks in return for a wide range of collateral. The ECB and Swiss National Bank have entered into swap arrangements with the Fed in order to offer US Dollars to European commercial banks. In contrast the Bank of England and the Bank of Canada have readdressed their collateral rules, allowing commercial banks to exchange a wider range of securities in return for cash funding.
Global money markets have seized since the summer, over fears of sub-prime losses from the US housing market adversely affecting corporate banks. This, coupled with year end funding pressures has resulted in commercial banks hording their stockpiles of cash, rather than lending to each other. Following the announcement, we initially saw global stocks rally before fading as uncertainty began to cloud investor’s confidence while money market conditions remained strained.