Banks launch joint effort to tackle credit crisis
Central banks across the world have launched an unprecedented joint effort to tackle the deepening credit crisis.
The US Federal Reserve, the European Central Bank, the Bank of Canada, the Bank of England and the Swiss National Bank unveiled a co-ordinated plan to ease an impending New Year freeze in wholesale money markets.
Each of the banks announced that they will pump additional reserves into their respective systems to help free up credit.
The move created an initial wave of cheer on stock markets around the world.
The FTSE 100 Index, which had been languishing in negative territory since the start of the session, raced ahead to stand 74 points higher at one stage as investors welcomed the news, before later seeing gains scaled back.
America’s Dow Jones Industrial Average also rose, surging more than 240 points ahead in early trading, helping recover some of the losses seen yesterday amid concern that the Federal Reserve had not done more to ease problems in the banking sector.
The Bank of England said today’s announcement was a measure to “address the elevated pressures in short-term funding markets”.
The London interbank lending rate – so-called Libor – has been ticking back up in recent weeks towards levels seen at the height of the summer credit squeeze.
And there are concerns that as banks rush to balance their books ahead of the year-end, credit conditions could tighten further.
Two weeks ago, Bank of England governor, Mervyn King, raised the alarm over a possible year-end worsening in the credit crisis.
He also said that a fear among US banks in particular over losses relating to the collapse of America’s sub-prime mortgage market was adding to the credit woes.
News on Monday that Swiss banking giant UBS expected an extra €15bn in losses from the credit turmoil put fresh pressure on the sector.
Banks globally have been hit by the credit troubles, which took hold in the summer and led to the high profile Northern Rock crisis.
Credit markets were squeezed as banks clamped down on lending to each other amid the fall out from America’s default-hit high risk mortgage market.
