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Major Central Banks Coordinate Against Credit Markets
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TThe Bank of Canada, the U.S. Federal Reserve, the European Central Bank, the Bank of England and Switzerland's central bank made a joint announcement saying they were taking coordinated measures “designed to address elevated pressures in short-term funding markets.
It's rare to see major central banks come together, but the global credit market is in dire need of mature planning. The move should address America's appetite for cash and prevent some major losses in 2008.
Some responses will include liquidity into short-term money markets, something the Bank of Canada plans to do. The Bank of Canada will also expand its list of collateral, something financial institutions have been begging the central bank to do for months.
Acceptable collateral for the term liquidity includes Government of Canada bonds and bonds guaranteed by the government, such as Canada Mortgage Bonds and securities backed by provincial governments, and bankers' acceptances and bearer deposit notes.
In March they will move to accept some kinds of asset-backed commercial paper, or ABCP, as collateral for borrowing from its standing liquidity function, a pool from which banks can borrow at the bank rate, on an overnight basis, to help deal with temporary liquidity problems in their settlements.
To be accepted as collateral, the ABCP can not be the type that froze Canadian markets in August. Rather, it must be backstopped under global rules, not looser Canadian rules, the central bank said.
The move is a clear indicator that the credit crunch is a serious concern now for the bank of canada.
In a statement timed to occur before the start of trading, the Fed said it planned to offer $40 billionUSD in emergency funds to banks next week through an auction process. Yet another temporary auction facility to make funds available to banks and was also setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.
The use of auctions to try to increase money supply acknowledges efforts to spur direct loans from the Fed to banks through the Fed's discount window had not worked as well as hoped because of banks' fears that investors could become worried if they started utilizing the Fed's discount window to any large extent.
Since the global credit crunch hit with force in August (largely due to poor lending policies in the US), central banks have been injecting massive amounts of money into the banking system in an effort to keep credit flowing.
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Ruby
Teller
Dec 12, 2007, 11:55 AM
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