Posted by WARREN MOSLER on October 29th, 2008
Still don’t have totals for Fed USD swap lines extended to Foreign CBs.
Some info here from last week:
By Simon Kennedy
Oct. 21 (Bloomberg) — The European Central Bank’s lending to banks and its exposure to possible collateral losses jumped to records last week as the battle against the credit crisis forced policy makers to shoulder more risk.
The Frankfurt-based ECB said it loaned banks 773.2 billion euros ($1.02 trillion) through monetary operations, up from 739.4 billion euros a week earlier and a 68 percent surge from the first week of September. Its liabilities to financial institutions rose to 470.3 billion euros, an increase of 4.4 percent from the previous week and up 123 percent since the start of last month.
While I’m less concerned over the ECB’s increased Euro lending it nonetheless indicates problems have not subsided.
The ECB is following the Federal Reserve and other central banks in combating the credit crunch by expanding its balance sheet as it injects more cash into the banking system. The downsides include taking on more risk as it accepts weaker collateral when lending.
“The urgency of the situation means that drastic measures need to be taken,” said David Mackie, chief European economist at JPMorgan Chase & Co. “Up until a month ago the balance sheet wasn’t growing. Now the bank is creating more and more money.”
The ECB became more aggressive after the collapse of Lehman Brothers Holdings Inc. on Sept. 15 prompted banks to hoard cash worldwide. To spur lending, the central bank has loaned money for longer timeframes and offered banks unlimited amounts of dollars and euros. It last week loosened rules on the collateral it will accept when making loans to include lower-rated securities, certificates of deposit and subordinated debt.
Demand for Cash
The ECB today said it loaned banks 305 billion euros in its regular weekly auction at a fixed rate of 3.75 percent. It also provided $101.93 billion in a 28-day dollar tender at a fixed rate of 2.11 percent, and an additional $22.6 billion, also for 28 days, via a currency swap against euros.
Don’t know what the total USD advances outstanding are.
With the financial crisis spilling over into the economy, demand for banknotes has also jumped. The value of notes in circulation rose to 721.8 billion euros, an increase of 9.7 billion euros from the previous week and 5.4 percent from the start of last month, today’s ECB data showed.
The eurozone is facing a ‘bank run’ as depositors flee to actual cash. This puts the banking system at risk with their current institutional structure.
When Lehman Brothers sought bankruptcy protection, its Frankfurt division owed between 8 billon euros and 9 billion euros to the ECB, the Wall Street Journal reported Oct. 7, without saying where it obtained the information.
ECB President Jean-Claude Trichet has said that while the bank is assuming more risk, it is doing so because of the greater threat of financial meltdown. “We have made decisions which are increasing our risks,” Trichet said in an Oct. 19 interview with France’s RTL Radio. “We are facing a systemic liquidity problem of first importance.”
The ECB’s risk-taking may be paying off. The cost of borrowing euros for three months fell to the lowest level today since Lehman filed for bankruptcy. The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 3 basis points to 4.96 percent today, the British Bankers’ Association said. That’s the lowest level since Sept. 12. The overnight dollar rate slid 23 basis points to 1.28 percent, below the Federal Reserve’s target for the first time since Oct. 3.
This would be near my last choice of ways to get term rates down!