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| ECB and Bank of England inject funds |
| ECB, 17.09.2008 |
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| By Ralph Atkins in Frankfurt and Delphine Strauss and Norma Cohen in London
Published: September 15 2008 09:00 | Last updated: September 15 2008 12:00
The European Central Bank said on Monday it had allotted €30bn ($42.04bn) in one-day liquidity to counter financial turmoil in the wake of the crisis in the US banking system, while the Bank of England said it would offer £5bn of extra reserves to help stabilise conditions in the sterling money markets.
The ECB said it had alloted the money at a marginal rate of 4.30 per cent and an average rate of 4.39 per cent. Altogether 51 banks bid €90.27bn. Earlier, using language similar to that previously used to signal possible intervention in financial markets, the Frankfurt-based institution said it “continues to closely monitor the conditions in the euro area money market”.
Meanwhile, the Bank of England said it would offer extra reserves to help stabilise conditions in sterling money markets as it seeks to stem the fall-out from Lehman Brothers’ slide into bankruptcy.
Many UK banks will be short of cash because they have lent Lehman money which is now tied up in the bankruptcy proceedings. The money is not necessarily lost, but the central bank may need to tide UK banks over until it becomes clearer how much they will ultimately recover
The Bank said it would auction £5bn through an exceptional fine tuning open market operation at 9:45 on Monday. The loans will mature on Thursday, when the Bank holds its regular weekly short term open market operation. The Bank later said it had received £24.1bn in bids for its £5bn injection. The allocation per bidder was 20.75 per cent.
The range around reserves targets at which reserves are remunerated at Bank rate will be unchanged at +/-20 per cent, but the Bank said it would review this depending on the provision of reserves over the next few weeks.
The Bank said it was “closely monitoring” market conditions and would “take actions to ensure the overnight rate is close to Bank Rate.”
The US Federal Reserve has said it would ease lending conditions, but the ECB already lends to eurozone banks against a broad range of collateral and earlier this month took action to restrict the use of some riskier assets in order curb what it saw as abuse of its generosity.
So far, the ECB has kept a very clear distinction between its liquidity-boosting operations in financial markets and its main interest rate policy, aimed at combating inflation.
Jacques Cailloux, economist at Royal Bank of Scotland, said, however: “With rising risks of feed-back effects from the financial crisis to the real economy, that separation could become increasingly untenable. While the ECB will obviously be reluctant to consider rate cuts, its past behaviour does not necessarily rule that out.”
The ECB’s comments came after the euro rose sharply on the back of Lehman Brothers’ announcements, and stock markets fell sharply. Meanwhile, Germany’s Bundesbank, Bafin, the country’s financial regulator, and the finance ministry, issued a joint statement describing German financial groups’ exposure to Lehman as manageable.
BaFin placed a moratorium on Lehman’s German unit, preventing asset sales or payments. The German business had €14.3bn of liabilities to institutional clients, BaFin said.
The announcement from BaFin followed a similar announcement from Japan’s Fiancial Services Agency. The Japanese regulator Lehman to retain assets in Japan. Lehman’s Chapter 11 filing revealed that Aozora and Mizuo had the biggest exposure of any unsecured lenders.
Copyright The Financial Times Limited 2008
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