BoE and ECB lend billions in bid to ease crisis

In a statement today, the Bank of England revealed that banks had bid £10 billion for the three-month money, 75% of which was lent at an interest rate of 5.36%. Meanwhile, the European Central Bank said it loaned €348.6 billion to more than 300 banks. Yesterday the US Federal Reserve auctioned $20 billion, although it did not specify how many banks had taken the extra money. The central banks are taking action after an agreement between themselves and two other major central banks - the Bank of Canada and the Swiss National Bank - in which they pledged to inject $100 billion into the money markets to try and reduce the interbank lending rate. However, there are fears that the $100 billion may not be enough to stem the crisis. The ECB yesterday announced it would offer unlimited funding to banks in a further move to alleviate the growing banking liquidity crisis over the Christmas holidays. It scrapped the usual upper limit on how much it lends to banks to ensure overnight interbank lending rates stayed close to its target of 4%.

The ECB said today that bids ranged between 4% and 4.45%. The action is significant, as it helps the banks find money in the European markets during the quiet holiday period. The ECB said it was willing to lend banks as much in two-week funds as they required, in its weekly refinancing auction. Barry Moran, a money market trader at Bank of Ireland, described the move to offer unlimited funding as „significant”. He said: „It does take a lot of the tension out of the market. There was a danger that people would bid rates significantly higher. „Now what effectively the ECB are saying is that if you bid at or above 4.21%, you’ll get your full allotment.” Unsecured interbank lending rates of two weeks and longer have soared in recent weeks as money has tightened up in wake of the continued credit crisis as banks worry about lending to each other.

The ECB move marks only the second time in the central bank’s nine-year history that it has announced in advance it will meet all bids at a particular rate. It took this unusual step on August 9, when concerns about European banks’ subprime exposure pushed Eurozone overnight rates to a peak. Yesterday the Swiss National Bank (SNB) offered up to $4 billion in short-term funds at a discount to the US Fed rate to ease strains on the interbank lending market. Last week the ECB and the SNB together offered $24 billion worth of swaps to assist European banks exposed to stress in the US. (telegraph.co.uk)