Central banks offer $20bn auctions to revive liquidity

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.

See also: ECB re-enters money markets as fears of volatility return
Risk USA: Rate cuts do not “bail out Wall St”
Bank of England and ECB act to boost markets
Central banks up liquidity

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