World's central banks pump billions into system
Friday March 28 2008
THE big central banks pumped billions more into the world's financial system as money market rates soared to their highest levels in four months.
Banks are clamouring for extra cash to meet capital requirements, ahead of Monday's quarterly book closing, reducing their willingness to lend and adding to strains in crisis-hit markets.
The US Federal Reserve prepared to pump $75bn into frozen credit markets, following moves by European central banks yesterday to help lenders who scrambled to meet quarter-end funding needs.
London interbank rates reflected banks' unwillingness to part with cash. Three-month sterling LIBOR funds edged above 6pc, the highest since late December and more than three-quarters of a point above the Bank of England's base rate.
Topped
The European Central Bank loaned banks an extra €15bn to tide them over the Easter and topped up lending at its last weekly auction by €50bn, although this has failed to have much impact on market rates.
Three-month euro money is costing over 4.4pc, compared with the ECB's 4pc benchmark.
The massive central bank injections are just short-term loans to allow banks to balance their books, as required by regulation, but in normal times most of this would be obtainable on the inter-bank market.
"The need for liquidity is becoming particularly acute into month-end, quarter-end," said Richard McGuire, fixed income strategist at RBC Capital Markets in London.
Distortion
"We are getting distortion from quarter-end, and banks are still reticent to lend," said William Knapp, investment strategist at MainStay Investments in New York.
The Bank of England lent £13.62bn at its regular one-week money-market operation, up from last week's £10.93bn.
Banks bid for almost three times that much, showing the intense demand for cash that there is.
The Swiss National Bank offered three-month funds at 2.2pc, in a move seen as an attempt to ease money market tensions due to fear of future losses in the banking sector.
On Wednesday, Bank of England Governor Mervyn King said a longer-term solution than the cash injections was needed to relieve, "the overhang on banks' balance sheets of assets in which markets have closed".
- Richard Leong and Krista Hughes
