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$20bn from Fed to ease credit woe $20bn from Fed to ease credit woe
(20 minutes later)
The US Federal Reserve is making billions of dollars available to banks in an auction in a bid to ease concerns about a global credit crunch. The US Federal Reserve is making billions of dollars available to banks through auction in an attempt to ease concerns about a global credit crunch.
Monday's offering is part of a plan the Fed has agreed with four central banks, including the Bank of England.Monday's offering is part of a plan the Fed has agreed with four central banks, including the Bank of England.
The central banks hope that the auction will make retail banks and investment houses happier to lend to each other.The central banks hope that the auction will make retail banks and investment houses happier to lend to each other.
In recent weeks, inter-bank lending has become more expensive raising fears the higher costs will hurt economic growth.In recent weeks, inter-bank lending has become more expensive raising fears the higher costs will hurt economic growth.
Risk controlRisk control
The main reason banks and investment houses have been less willing to lend to each other is the downturn in the US property market.The main reason banks and investment houses have been less willing to lend to each other is the downturn in the US property market.
Many banks have been caught out by the credit squeeze and have had to cut the value of their investments, costing them billions of dollars. A subsequent surge in mortgage defaults and bad debts has forced many banks to cut the value of their investments, costing them billions of dollars.
As a result, they have had to keep hold of their cash to make sure that their balance sheets remain healthy. When they have lent money, they have done so at a higher cost.As a result, they have had to keep hold of their cash to make sure that their balance sheets remain healthy. When they have lent money, they have done so at a higher cost.
The worry for the Fed and other central banks is that the higher costs would eventually be passed on consumers, slowing economic growth.The worry for the Fed and other central banks is that the higher costs would eventually be passed on consumers, slowing economic growth.
In order to ease concerns about banking sector losses and add liquidity to money markets, the five central banks said last week that they would make $110bn (£54bn) available in loans.In order to ease concerns about banking sector losses and add liquidity to money markets, the five central banks said last week that they would make $110bn (£54bn) available in loans.
As well as the Bank of England and Fed, the European Central Bank and the national banks of Canada and Switzerland are also involved.As well as the Bank of England and Fed, the European Central Bank and the national banks of Canada and Switzerland are also involved.
'Positive feeling''Positive feeling'
Analysts said that the promise of extra cash was needed because the interbank lending rate had remained stubbornly high despite interest rate cuts in the UK and US.Analysts said that the promise of extra cash was needed because the interbank lending rate had remained stubbornly high despite interest rate cuts in the UK and US.
On Monday, the Fed offered banks $20bn of 28-day loans, and analysts said that they expected demand to be strong.On Monday, the Fed offered banks $20bn of 28-day loans, and analysts said that they expected demand to be strong.
"There is a positive feeling in the marketplace about the auction," said Deborah Cunningham of Federated Investors."There is a positive feeling in the marketplace about the auction," said Deborah Cunningham of Federated Investors.
The Bank of England is due to hold its first auction on Tuesday.The Bank of England is due to hold its first auction on Tuesday.
In London on Monday, the three-month interbank lending rate, also called the Libor, dropped for a third session.
It was down at 6.431%, compared with 6.627% on Wednesday when the central banks unveiled their rescue plan.
The lower the rate, the cheaper it is for banks to borrow money.