The Federal Reserve, the European Central Bank (ECB) and the central banks of the UK, Canada and Switzerland have agreed upon a series of auctions to provide billions for credit-starved financial institutions.The national banks will next week hold the first in a series of auctions to provide billions in loans to depository institutions at discount rates, as long as the banks can post collateral to be held against them. The Fed will auction $20 billion on December 17, for a 28-day term, with another to be held on December 20. Similarly the ECB will conduct two US-dollar auctions for European banks on the same day, with as much as $20 billion available for cash-hungry banks. The funds have been provided by the Fed through a currency swap with the ECB. In perhaps the biggest policy shift, the Bank of England will make £11.35 billion available to banks at its auction on December 18, a fourfold increase on the original £2.85 billion it has previously proposed offering to banks. In another departure from tradition, the Bank will accept mortgage-backed securities and dollar-denominated securities as collateral. The auctions are the latest move from the central banks to reintroduce liquidity into the stalled markets. Interbank rates that dictate the cost of borrowing between banks remain much higher than benchmark interest rates, suggesting banks remain wary of extending each other credit. The London Interbank Offered Rate (Libor) on a three-month basis was 6.64% on December 6, 114 basis points above the base rate, which was cut to 5.5% the same day. The sums offered in the co-ordinated auctions are dwarfed by capital injections the central banks made into their respective economies earlier in the year. The ECB provided European money markets with €94.8 billion in August, while the Federal Reserve has stumped up well over $100 billion for the embattled markets since the credit crisis began back in August.
More on Structured Products
ECB rate cut to drive modest recovery in eurozone
Correlation sensitivity in multi-asset structured products explained
UK investors offered autocallable in conservative or bullish versions
Schlumberger product puts capital at risk if American barrier is breached
Sign up for Risk.net email alerts
Nominated for two technology awards
Nominated for post trade technology award
Sponsored webinar: Collateral and counterparty tracking
Isda directors warn on fragmentation, access and liquidity - but expect problems to pass
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.