Central banks promise unlimited dollar lending

Three central banks - the Bank of England, the European Central Bank and the Swiss National Bank - will offer unlimited short-term US dollar lending from Wednesday, in the latest attempt to improve interbank liquidity.

The US Federal Reserve has agreed to increase its temporary swap facilities with the three banks in order to provide them with sufficient dollar funding.

In a joint announcement this morning, the banks said they would provide seven-day, 28-day and 84-day loans at rates fixed in advance. Collateral requirements would be unchanged - the Bank of England will accept the same expanded list of collateral, including highly-rated asset backed commercial paper and asset-backed securities, that it announced on October 3.

The Bank of Japan said it was considering joining the scheme - last week it voiced support for a coordinated rate cut but would not join in, saying that the Japanese money market was still relatively stable and economic conditions remained benign.

The unlimited lending will continue "as long as needed, and at least until January 2009", the ECB said; the Fed added that the expanded swap lines would be in place until April 2009.

The first test of the new facility will be on October 15, when the Bank of England has scheduled a one-week fixed-rate US repo operation with "no maximum bid size", it said this morning. The Swiss National Bank will also hold its first seven-day US dollar repo auction on the same day, as will the ECB.

See also: Rate cut not meant for financial markets, central banks say

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