Liquidity added to banking system...
From CBS Marketwatch.com
Central banks add liquidity to system
Fed, ECB, BOJ inject $118 billion into banking system
By Rex Nutting, CBS.MarketWatch.com
Last Update: 2:03 PM ET Sept. 12, 2001
WASHINGTON (CBS.MW) - The world's central bankers moved to reassure markets that the
global financial system won't seize up after Tuesday's terrorist attack in New York.
"We are committed to ensuring that this tragedy will not be compounded by disruption to the global
economy," the Group of Seven finance ministers said in a joint statement.
"Our central banks have indicated that they will provide liquidity to ensure that financial markets
operate in an orderly fashion," the G-7 statement said.
The Federal Reserve, the U.S. central bank, said Tuesday that it would provide whatever liquidity
banks needed to satisfy their demands for cash.
The Fed added an unusually large $38.25 billion in temporary reserves into the U.S. banking system
on Wednesday, Reuters said.
On Wednesday, the central bank issued a statement, pledging to keep as much cash available to
banks as needed going forward.
"Discount window borrowing yesterday was substantially elevated above normal levels," a Fed
spokesman said. "The lending proceeded smoothly. The discount window will remain available to
supply liquidity to the financial system as needed."
Many commentators expect the Fed to lower its federal funds overnight interest rate from the current
3.5 percent.
The European and Japanese central banks injected billions of dollars of
liquidity into their systems Wednesday in an effort to boost confidence.
See Global Markets story.
The European Central Bank conducted a special one-day loan, accepting
all of the 69 billion euro ($62.5 billion) in tenders it received at its normal
4.25 percent interest rate.
"The ECB and the national central banks are standing ready," ECB
president Wim Duisenberg said. "The ECB has been in close contact with
other major central banks.''
It's "far too early to judge'' what the economic consequences of the attacks
are, Duisenberg said, adding that an immediate rate cut ``would rather have
inspired a reaction of panic than of stability and calmness.'' The ECB may
have to lower its growth forecasts for next year and 2003, he added.
Meanwhile, the Bank of Japan injected 2 trillion yen ($16.8 billion) into its
system, raising the level of accounts at the bank to 8.3 trillion from its
normal 6 trillion yen target.
"The Bank of Japan will do all it can do to help smooth fund settlements and ensure stability in the
financial system, including providing ample amount of liquidity," BOJ Governor Masaru Hayami said in
a statement.
"For sure, the central banks will add a lot of cash to the system in the very near term," said Carl
Weinberg, chief economist at High Frequency Economics. "However, it is not obvious that these
policies are going to result in lower interest rates."
"Access to liquidity by the banking system is the standard by which Fed policy has to be judged
today, not interest rate levels," Weinberg said.
Bank of England Gov. Edward George told the BBC a coordinated interest rate cut is unlikely because
all the economies are in a different economic situation, Reuters reported.
"But clearly if it became apparent that the U.S. was weaker than we expected it to be, then that would
be a factor which would have a dampening effect on all of us and there would be more of an inclination
to move to counteract that," George said.
"If you need cash, we have it," is the way Irwin Kellner, chief economist for CBS.MarketWatch.com,
explains it.
"The Fed doesn't want anyone to worry" that transactions won't be honored, Kellner said.
During times of crisis, many people may lose faith in institutions like banks or brokerage houses and
may demand cash immediately.
Since no financial institution can keep all of its assets in cash and expect to make any money, a
significant run on deposits can squeeze banks and lead to a domino effect where one institution fails
and then brings down another.
Weinberg said the fragile Japanese system might have the most to lose from the financial crisis. "Last
night's equity panic came at the worst possible moment," he said, adding that he did not believe
Japan's authorities would force banks and insurance companies to mark their assets to market value
on Oct. 1 as they normally do.
The Bank of England said the Federal Reserve had asked all central banks to minimize trading in
dollars to avoid exacerbating financial market turmoil, Reuters reported. The international financial
markets association, the ACI, also called on banks to refrain from unnecessary trading activity.
The dollar rose Wednesday by 0.4 percent against the euro at 90.68 cents, but fell an additional 0.4
percent against the yen to 119.33. See our currencies page. |
