WASHINGTON/FRANKFURT -- Major central banks on Friday announced larger liquidity injections in a bid to wrestle down market interest rates as they extended joint efforts to tackle stubborn tensions on money markets.
The U.S. Federal Reserve said it would step up the amounts offered in some cash auctions to financial institutions, while the European Central Bank and the Swiss National Bank will boost their auctions of U.S. dollar funds for European banks.
It is the third phase of coordinated liquidity action to be announced since last December, when some money market rates were nearing their highest levels in seven years.
"In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing an expansion of their liquidity measures," the three central banks said in statements.
The Fed will also widen the scope of assets it accepts as collateral in its Term Securities Lending Facility auctions, while in a separate measure, the Bank of England will allow British banks to hold more funds at the central bank, giving them greater scope to meet liquidity needs on any given day.
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The moves follow a steady increase in the interest rates banks charge for lending to each other, reflecting a wish to hold on to cash for extra security as well as concerns about counterparty exposure to bad investments in the wake of nine months of market upheavals.
London interbank offered rates for three-month euro funds chalked up their 12th straight weekly increase on Friday and although LIBOR rates for three-month dollar and sterling funds eased, market rates remain well above official central bank borrowing costs and the cost of risk-free money.
The Fed said it was increasing the amounts offered in its Term Auction Facility auctions, held every two weeks, to $75 billion from $50 billion, beginning with an auction on May 5.
It also said it was increasing an existing temporary currency swap line with the ECB to $50 billion, from $30 billion, and increasing a swap line with the SNB to $12 billion from $6 billion. The timeframe for the swap lines will also be extended until the end of January 2009.
The ECB, which has held seven auctions of U.S. dollars so far, will extend the amount of cash available at each auction to $25 billion, from $15 billion so far. It will hold auctions every two weeks, as it has since late March.
The SNB will increase the frequency of its U.S. dollar auctions to fortnightly, but maintain the same upper limit of $6 billion per auction.
Both the ECB and SNB said they would keep providing extra U.S. dollar liquidity for as long as needed.
The Bank of England said it did not see any shortage of U.S. dollar liquidity and therefore was not participating in the plan.
In addition to expanding the size of its auctions, the Fed will widen the scope of acceptable collateral for Term Securities Lending Facility loans to include AAA-rated asset-backed securities.
Like its long-standing discount window lending operations, it already accepted U.S. Treasury and agency securities and agency mortgage-backed securities.
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