Fed easing liquidity in funding markets
Updated: 2008-03-11 22:31
WASHINGTON -- The Federal Reserve on Tuesday ramped up efforts to provide more relief to squeezed financial institutions, a coordinated action with other central banks aimed at easing a global credit crises that threatens to push the US economy into its first recession since 2001.
 US Federal Reserve Chairman Ben Bernanke (C) poses with British Central Bank Governor Mervyn King (L) and European Central Bank President Jean-Claude Trichet for a photo during the G7 meeting in Tokyo February 9, 2008. [Agencies] |
The Fed said it will make up to $200 billion in Treasury securities available to big Wall Street investment houses and banks. The new action is designed to ensure that there is an ample supply of Treasury securities. With strains in financial markets, demand has grown for Treasury securities, considered the safest investment in the world because they are backed by the US government.
The move comes as banks and other financial institutions face cash crunches.
"Pressures in some of these markets have recently increased again," the Fed said in a statement. "We all continue to work together and will take appropriate steps to address those liquidity pressures." The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.
The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers -- big Wall Street investment firms and banks that trade directly with the Fed -- with short-term loans of Treasury securities. They would pledge other securities -- including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannnie Mae and Freddie Mac -- as collateral for the loans of Treasury securities.The loans would be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008.
The new lending initiative "is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally," the Fed said.
The Fed since December has been making short-term loans of cash available to banks through a new auction facility. It has provided $160 billion available to squeezed banks in hopes it will help them to continue lending to individuals and companies.
In addition, the Fed also on Tuesday said it has authorized increases in existing programs called "swap lines" with the European Central Bank and the Swiss National Bank
"These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB respectively," the Fed said, extending the term of these swap lines through Sept. 30.
Last week, the Fed announced that it would increase the amount of loans it plans to make available to banks this month to $100 billion. At the same time, it said it would make another $100 billion available to a broad range of financial players through a series of separate transactions.
The Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit.
A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Financial companies wracked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market's bust. Problems first started in the market for subprime mortgages -- those made to people with blemished credit histories. However, troubles have spread to other areas.
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