The US Federal Reserve has increased the scale of its Term Auction Facility (TAF), intended to provide extra liquidity in the securities market, and has relaxed its criteria for collateral in another support, the Term Securities Lending Facility (TSLF).
The TAF was set up in December 2007 to support depository institutions with 28-day discount-rate loans. At first it issued only $20 billion in loans, but this amount has since been increased - yesterday's auction offered loans worth $75 billion, up from $50 billion two weeks previously on April 21. Demand for previous facilities has been strong - banks applied for a total of $88 billion in loans on April 21 - and today the Fed reported it had received $96.6 billion in applications for the $75 billion offered yesterday.
The Fed will also back increased lending by the European Central Bank (ECB) and the Swiss National Bank (SNB) by offering them swaps worth $50 billion and $12 billion respectively, up from $30 billion and $6 billion, to back up their own US-dollar auctions.The ECB said it would increase its fortnightly auctions to $25 billion and the SNB from $6 billion to $12 billion.
The Fed also announced it would extend the TSLF to accept AAA-rated asset-backed securities as well as mortgage-backed securities and collateralised mortgage obligations, starting with this week's auction. In contrast to the TAF, the TSLF has seen weak demand - the last auction, on May 1, attracted only $24.1 billion in bids compared to $25 billion offered.
The news implies that the Fed, like other central banks, believes the credit crisis still has some way to run. The London interbank offering rate (Libor) remains high, at 2.7575% today (three-month US dollar rate). And the Bank of England, although its latest Financial Stability Report asserted subprime-related assets had been written down too far, also introduced a new £50 billion liquidity injection last month.
A Fed survey published yesterday found that US banks were still tightening their mortgage lending standards. Few banks are still prepared to make subprime loans at all, and standards on all forms of consumer credit, including home equity loans and credit cards as well as mortgages, have tightened significantly since the start of the year, the survey said.
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