The central banks join forces to deal with credit crisis

Five central banks launched a coordinated attempt to boost the liquidity in the financial markets, in the hope of avoiding a repeat of the credit crisis in the summer.

In a joint announcement this afternoon, the Bank of England, the US Federal Reserve, the European Central Bank, the Bank of Canada, and the Swiss National Bank said they were addressing "elevated pressures in short-term funding markets".

The plan sent the FTSE 100 index back into positive territory having earlier been down on the day. On Wall Street, the Dow Jones Industrial Average opened over two hundred points higher.

However, the celebrations appeared short-lived. Just ahead of the market's close in London, the FTSE 100 had moved back into negative territory, with a loss of a couple of points.

Concern has been growing in recent weeks that financial institutions are again unwilling to loan to each other.
By allowing commercial banks to borrow more money from them, the central banks are hoping to avoid a repeat of the Northern Rock crisis.

The Bank of England has agreed to allow commercial banks to borrow a total of £11.35bn through two auctions on December 18 and January 15 - £10bn will be available in loans repayable after three months.
The auctions are part of its usual long-term open market operations, but until today the Bank was only offering £2.85bn.

As usual all loans must be secured against a bank's assets, but on this occasion the Bank is relaxing its rules on securitisation. It will accept a wider range of securities, including bonds issued by G10 government agencies and sovereign funds.
The Federal Reserve said it would offer US banks up to $40bn (£19.5bn) through two auctions next week. It plans to hold two further auctions in January, but has not decided how much to offer.

It is also entering into foreign exchange swap agreements with the ECB and the Swiss central bank, to try to tackle the shortage of dollar funds in Europe.

I think it's a good thing that the central banks anticipate to avoid a new crisis. This pact is also good for the customers: they won't lose their money like they almost have at the Northern Rock crisis.

Source