Central banks ride to the rescue

The world's central bankers have teamed up to try and bail out the money markets, promising to inject some extra funds into the system. Better late than never, some might say.

by
Last Updated: 31 Aug 2010

The Bank of England said on Wednesday that it was joining forces with the ECB, the US Federal Reserve, the Bank of Canada and Swiss National Bank to take measures ‘designed to address elevated pressures in short-term funding markets’. In other words, it’s a co-ordinated attempt to get the credit markets moving again, and to stop banks sitting on their cash piles ahead of their year-end.

Certainly the banks haven’t been any more willing to lend to each other following last week’s interest rate cut. And the situation in the US is no better – traders were pinning their hopes on a big Fed rate cut on Tuesday, so share prices plunged yesterday when it came in below expectations.

Some people are even suggesting that the central banks’ tie-up was a response to this, but of course they’re denying this – and frankly, given the speed with which these public institutions usually work at the best of times, we’re inclined to believe them.

Anyway, now the Bank is going to raise the amount of money it’s offering to the market from £2.85bn to £11.35bn, and it’s also going to broaden the definition of the collateral that banks can use to borrow this money. Previously they’ve only been able to use a limited range of fire-proof assets to secure the loan – now riskier assets like mortgage-backed securities can be used too.

Sounds sensible enough – and the rebound of shares on both sides of the Atlantic shows that the markets were fairly pleased with the move.

But it’s all a bit embarrassing for the Bank of England, whose governor Mervyn King initially refused to provide cheap access to funds on the grounds of moral hazard’ – that it was wrong to bail out institutions who had got themselves into a mess by excessive risk-taking. Since that’s exactly what it’s going to end up doing, it leaves Merv with large quantities of egg on his face. Unless of course he's just decided that they've suffered enough.

And welcome though it may be, it's just a shame that it comes about three months too late to do Northern Rock any good...

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