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Central Banks act to reduce pressure

Wednesday, 12 December 2007

The Bank of England will make an extra £8.5bn available to British lenders in order to address tensions in short-term funding markets.

The Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank all announced measures designed to address elevated pressures in short-term funding markets.

The Bank of England said it had already scheduled long-term repo open market operations (OMOs) on 18 December and 15 January.

In those operations reserves will, as usual, be offered at 3, 6, 9 and 12-month maturities against the Bank’s published list of eligible collateral. The total amount of reserves offered at the 3-month maturity will, however, be expanded and the range of collateral accepted for funds advanced at this maturity will be widened.

The total size of reserves offered in the operations on 18 December and on 15 January will be raised from £2.85 billion to £11.35 billion, of which £10bn will be offered at the 3-month maturity.

The Bank said it will accept a wider range of high quality securities as collateral against funds advanced at the 3-month maturity.

It announced that there would be no further changes to the scheduled operations on 18 December and 15 January, adding that it would review whether to make any changes to operations scheduled after January in the light of market conditions at the time.

The Bank said it intended to offset the additional reserves taken up in the long-term repo operations in December and January in its other operations, in order to keep overnight market interest rates in line with bank rate.

The British Bankers' Association (BBA) welcomed the central banks' decision, calling it "a constructive and imaginative initiative" which should help to address the markets' short term borrowing needs.

"It is also importantly an international solution to an international issue: a recognition that all major economies are feeling the effects of the credit crunch and that together they can help to address them," the BBA said.

A market notice will be released on Friday 14 December with further operational details, including details of collateral and settlement arrangements.

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