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$20bn from Fed to ease credit woe $20bn from Fed to ease credit woe
(20 minutes later)
The US Federal Reserve is making billions of dollars available to banks through auction in an attempt to ease concerns about a global credit crunch. The US Federal Reserve is making billions of dollars available to major banks in an attempt to ease concerns about a global credit crunch.
Monday's offering is part of a plan the Fed has agreed with four central banks, including the Bank of England. Monday's $20bn auction is the first step in 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.The central banks hope that the auction will make retail banks and investment houses happier to lend to each other.
In recent weeks, inter-bank lending has become more expensive raising fears the higher costs will hurt economic growth. Such lending has become more expensive recently, adding to the credit squeeze.
The central banks plan to offer more than $100bn in loans to retail banks, after it became clear that cuts in interest rates were not having an effect on inter-bank lending.
Risk controlRisk 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 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.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, they have had to keep hold of their cash to make sure that their balance sheets remain healthy. When they have lent money, they have done so at a higher cost. As a result, the banks all 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 consumers, slowing economic growth.The worry for the Fed and other central banks is that the higher costs would eventually be passed on consumers, slowing economic growth.
In order to ease concerns about banking sector losses and add liquidity to money markets, the five central banks said last week that they would make $110bn (£54bn) available in loans.
As well as the Bank of England and Fed, the European Central Bank and the national banks of Canada and Switzerland are also involved.As well as the Bank of England and Fed, the European Central Bank and the national banks of Canada and Switzerland are also involved.
'Positive feeling''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.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.
On Monday, the Fed offered banks $20bn of 28-day loans, and analysts said that they expected demand to be strong.On Monday, the Fed offered banks $20bn of 28-day loans, and analysts said that they expected demand to be strong.
"There is a positive feeling in the marketplace about the auction," said Deborah Cunningham of Federated Investors."There is a positive feeling in the marketplace about the auction," said Deborah Cunningham of Federated Investors.
The Bank of England is due to hold its first auction on Tuesday.The Bank of England is due to hold its first auction on Tuesday.
In London on Monday, the three-month interbank lending rate, also called the Libor, dropped for a third session.In London on Monday, the three-month interbank lending rate, also called the Libor, dropped for a third session.
It was down at 6.431%, compared with 6.627% on Wednesday when the central banks unveiled their rescue plan.It was down at 6.431%, compared with 6.627% on Wednesday when the central banks unveiled their rescue plan.
The lower the rate, the cheaper it is for banks to borrow money.The lower the rate, the cheaper it is for banks to borrow money.
The central banks do not plan to disclose which retail banks have taken up the auction.