The Bank of England and European Central Bank joined Asian authorities in pumping more cash into banks today to persuade them to resume lending to each other as a sector crisis spread to Europe.
With the end of the financial quarter upping money market tensions, the ECB announced it would make an extra batch of 38-day funds available to euro zone banks and keep the extra cash in play until at least early 2009.
The Bank of England said it would offer £40 billion in three-month funds today in an effort to improve sterling market conditions after a weekend of bank failures in Europe and talks in the United States to seal a $700 billion bailout.
The Bank of Japan added 1.5 trillion yen ($14.2 billion) to its banking system, the 9th consecutive day it has pumped cash in, before adding another 400 billion yen on a spot basis, while the Reserve Bank of Australia added A$2.7 billion ($2.2 billion) to keep lending among banks going.
As US lawmakers geared up for a vote on a $700 billion fund to buy bad debt to alleviate the financial crisis, the cost of short-term US dollar funding today drifted lower.
But a string of emergency bank nationalisations in Europe renewed fears about the health of the banking sector and increased investor nervousness by suggesting the year-old global credit crisis is far from over.
Financial group Fortis was forced to accept a €11.2 billion injection by the governments of Belgium, the Netherlands and Luxembourg after talks with ECB President Jean-Claude Trichet to prevent financial contagion engulfing one of Europe's top 20 banks.
In Britain, the government nationalised troubled mortgage lender Bradford & Bingley and sold its branches and deposits to Spanish bank Santander.
And in Germany mortgage lender Hypo Real Estate struck a last-minute deal with a group of banks for credit to resolve a refinancing squeeze.
"The fact that major European institutions have gone down illustrates how far reaching the banking crisis is, and there is no suggestion yet that we can put this episode behind us," said ING rate strategist Padhraic Garvey.
Once a byword for safety and liquidity, the short-term lending market in which banks lend to each other has repeatedly seized up in the financial crisis because of increasing worries over the creditworthiness of borrowers.
In another liquidity first for the ECB, the central bank called for bids in a special 5-1/2 week tender - covering the end of the quarter - and said it would act as needed to keep overnight rates near its 4.25 percent benchmark.
"The ECB will continue to steer liquidity towards balanced conditions in a way which is consistent with the objective to keep very short term rates close to the minimum bid rate," the central bank said in a statement.
At 10am, overnight euros were trading at a bid/ask spread of 3.85/3.95 per cent, according to Reuters data, although quoted prices do not fully reflect market conditions.
Euro zone banks deposited a record €28 billion at the ECB overnight as of yesterday rather than lending it out to other institutions, showing mistrust over fellow banks' soundness.
The ECB, BoE and the Swiss National Bank also continue to offer extra dollar liquidity to local institutions as part of a deal with the US Federal Reserve.
The BoE received bids worth 1.31 times the amount on offer in its $10 billion tender and results of the ECB and SNB actions are due later today.
In Europe, overnight dollars traded at a bid/ask spread of 2.0/2.5 per cent at 10am, according to Reuters data. The rate on overnight dollar funds in Asia fell as low as 1.5 per cent and was as high as 3 per cent, dealers said.
That compared with a range of 2.5 per cent to 3.5 per cent on Friday and 10 per cent after the collapse of Lehman Brothers earlier this month.
Reuters