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The
US Federal Reserve is making billions of dollars available
to major banks in an attempt to ease concerns about a global
credit crunch.
Yesterday’s US$20 billion auction is the first step
in a plan agreed among five central banks, including the
Bank of England and the European Central Bank.
The central banks hope that the auction will make retail
banks and investment houses happier to lend to each other.
Such lending has become more expensive recently, adding
to the credit squeeze.
The central banks plan to offer more than $100 billion in
loans to retail banks, after it became clear that cuts in
interest rates were not having an effect on inter-bank lending.
Risk control
The main reason banks and investment houses have been less
willing to lend to each other is the downturn in the US
property market.
The banks lent heavily to individuals taking out mortgages
which they now may not be able to repay.
A subsequent surge in mortgage defaults and bad debts has
forced many banks to cut the value of their investments,
costing them billions of dollars.
As a result, the banks fear that they might need any spare
cash they have to cover their losses.
The worry for the Fed and other central banks is that the
higher costs would eventually be passed on to consumers,
slowing economic growth.
As well as the Bank of England and Fed, the European Central
Bank and the national banks of Canada and Switzerland are
also involved in the plan, announced last week.
'Positive feeling'
Analysts said that the promise of extra cash was needed
because the interbank lending rate had remained stubbornly
high despite interest rate cuts in the UK and US.
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