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ECB offers banks unlimited funds ECB lends $500bn to lower rates
(about 2 hours later)
The European Central Bank is to offer banks unlimited funds at a below-market rate, in a cash injection to counter the impact of the global credit crunch. The European Central Bank has allocated 348.67bn euros($502bn; £249bn) to banks at a below-market rate in a refinancing move to ease tightened credit markets.
It is one of five central banks that have pledged to inject billions in emergency cash into money markets. It is one of five central banks that have injected billions in emergency cash into money markets.
The aim is to cut the cost of lending between retail and commercial banks, which has jumped in the past few weeks.The aim is to cut the cost of lending between retail and commercial banks, which has jumped in the past few weeks.
All banks with enough collateral, and which submit bids of at least 4.21%, will receive funds from the ECB. All banks with enough collateral, and which submitted bids of at least 4.21%, received funds from the ECB.
The interest rate being charged on the loan is lower than the 4.9% market rate for interbank borrowing which has been in place over the past few days. The ECB move - making the extra cash available over the next two weeks -will ease fears of a credit meltdown over the Christmas period, when banks need extra cash.
The idea is to try and bring down interbank rates closer to the ECB's target interest rate of 4%. Cutting interbank rates
The hope is that lower interbank rates will mean that banks will also be able to make more funds available at cheaper rates to companies and individuals.
The ECB' action has succeeded in cutting short-term lending rates, although they are still above the 4% ECB refinancing rate..
In Frankfurt on Tuesday morning the two-week Euribor average of interbank unsecured lending rates did fall to 4.452%, compared to rates for two-week euro money market rate of 4.949% for interbank borrowing which has been in place over the past few days.
The two-week ECB refinancing operation is the first time it has said it would offer banks unlimited funds, above a certain interest rate, since 9 August when the credit crisis started.The two-week ECB refinancing operation is the first time it has said it would offer banks unlimited funds, above a certain interest rate, since 9 August when the credit crisis started.
Central bank coordinationCentral bank coordination
The main reason banks have been unwilling to lend to each other is a downturn in the US property market.The main reason banks have been unwilling to lend to each other is a downturn in the US property market.
A surge in mortgage defaults and bad debts has forced many banks to cut the value of their mortgage investments, costing them billions of dollars.A surge in mortgage defaults and bad debts has forced many banks to cut the value of their mortgage investments, costing them billions of dollars.
As a result, the banks fear that they might need any spare cash they have to cover their losses.As a result, the banks fear that they might need any spare cash they have to cover their losses.
Central banks have also been boosting liquidity into the banking sector to ensure banks keep offering credit to businesses.Central banks have also been boosting liquidity into the banking sector to ensure banks keep offering credit to businesses.
On Monday, the US Federal Reserve made $20bn available through auction, though it did not say how many banks took advantage of the extra money.On Monday, the US Federal Reserve made $20bn available through auction, though it did not say how many banks took advantage of the extra money.
And on Tuesday the Bank of England is set to lend more than another £10bn in funds.And on Tuesday the Bank of England is set to lend more than another £10bn in funds.
As well as the Bank of England, the Fed, and the European Central Bank, the national banks of Canada and Switzerland are also involved in the funding plan.As well as the Bank of England, the Fed, and the European Central Bank, the national banks of Canada and Switzerland are also involved in the funding plan.
But some analysts say that until the banks reveal the true scale of their potential losses, the central banks will be unable to do much to ease the credit crunch.But some analysts say that until the banks reveal the true scale of their potential losses, the central banks will be unable to do much to ease the credit crunch.