WASHINGTON (AFP) — The Federal Reserve took further steps Wednesday to battle a global credit crunch, including an extension of an emergency lending program for investment firms facing a liquidity squeeze.
The Fed said it took the actions "in light of continued fragile circumstances in financial markets."
In addition to the extension of credit to investment banks, the Fed said it would lengthen the terms of another program to help retail banks meet funding needs, and extend reciprocal credit arrangements with the European Central Bank (ECB) and Swiss National Bank to help European banks get dollar funding.
"The programs are designed to combat systemic risks to the financial system related to short-term funding pressures -- pressures that can be significantly exaggerated by contagion and speculative bandwagon effects," said economist Brian Bethune at Global Insight.
"These pressures re-emerged at the end of June and in early July -- the fourth episode of severe pressures in the financial markets since the crisis erupted in US and European financial markets in August 2007."
The US central bank will extend past the original September expiration date to January 30 a program aimed at helping get liquidity to so-called primary dealers, big investments firms which have a relationship with the Fed.
The program was implemented after the collapse of Wall Street giant Bear Stearns, which faced a cash squeeze after being unable to borrow in private markets to fund operations.
It was the first time since the 1930s that the Fed had offered credit to non banks.
In a further step to help stressed investment firms, the central bank said the New York Fed would auction options for these firm to borrow Treasury securities to meet short-term cash needs. The Fed is adding 50 billion dollars to the program in addition to the 200 billion dollars offered through the program known as TSLF, or Term Securities Lending Facility.
Primary dealers eligible for the program include 19 big investment firms including Goldman Sachs and Merrill Lynch as well as foreign-based companies with US operations such as UBS and Daiwa Securities.
The Fed also Wednesday announced a new longer-term loan program for banks under its term auction facility implemented last year to help depository institutions get liquidity without resorting to the Fed's discount window, which sometimes carries a stigma.
The banks will be able to obtain loans for up to 84 days, up from the current 28 days.
Stephen Gallagher, economist at Societe Generale, said the new move will help banks facing problems providing liquidity for mortgages.
"The Fed wants to maintain easy financing during this time," Gallagher said.
"Mortgage rates have been rising, but the direct benefit to the mortgage markets from this extension is dubious. Banks need to raise funding and the environment is poor. The Fed is offering banks additional support in this time period."
In coordination with the Fed, the ECB and the Swiss central bank agreed to extend their swap lines to accommodate the longer maturities. These swaps allow the other central banks to provide dollar funding to financial firms in Europe.
The Fed authorized an increase in its dollar swap line with the ECB to 55 billion dollars from 50 billion. The size of the SNB's swap line remains at 12 billion dollars. Both are authorized through January 30.
Global Insight's Bethune estimated that the previous programs "were equivalent to a reduction in effective short-term borrowing costs of about 25 to 30 basis points, and this latest expansion would bump this effective reduction in borrowing costs -- perhaps by an additional 10 to 15 basis points -- depending on market conditions."
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