European central banks try to calm jittery nerves ahead of holiday weekend
FRANKFURT: European central banks injected piles of fresh cash into the financial system Thursday in an attempt to get nervous banks through the Easter holiday weekend.
On top of adding more liquidity, the governor of the Bank of England, Mervyn King, brought Britains top bankers into a closed-door session to discuss ways to restore “more orderly” market conditions.
The Bank of England described the meeting as routine, but it was only called last week - and comes a day after the central bank took the unusual step of publicly slapping down rumors of a brewing disaster among British banks.
That came in the wake of the collapse of Bear Stearns in the United States, the latest victim of the credit crunch that began last summer.
But the crisis showed no sign of ending Thursday. Europes first major victim, IKB Deutsche Industriebank, on Thursday announced new writeoffs linked to its investments in mortgage-backed securities in the United States, and said it would lose nearly \1 billion this year.
The European Central Bank surprised markets with a \15 billion infusion of extra loans that banks can use to firm up balance sheets over the holiday weekend. It is also a prelude to end-of-quarter accounting, a time when demand for cash typically rises.
The ECB also went through with a $15 billion cash auction, part of previously scheduled currency swap agreement with the U.S. Federal Reserve.
For its part, the Bank of England loaned 5 billion.
Money markets, the short-term lending pool that banks tap for day-to-day operations, have turned especially tight in the last few weeks, with pressures rising to levels not seen since late last year.
The rate for three-month loans among banks rose to 4.67 percent in the euro area, reflecting the extreme caution that has gripped lenders around the world and led to a credit squeeze for the broader economy in the United States but not - so far - in continental Europe.
King, head of the British central bank, met with chief executives from Britains five largest banks - Royal Bank of Scotland, Lloyds TSB, HSBC, Barclays and HBOS - to discuss whether the British central bank should do more to strengthen lenders financial position.
But in a statement issued afterward, the central bank gave few details about what was discussed.
“The Bank of England and the banks agreed to continue their close dialogue with the objective of restoring more orderly market conditions,” it said.
British banks have long argued that central banks should accept more kinds of securities as collateral for lending, a step that would allow the banks to offload investments of questionable value. The Bank of England has resisted such steps, arguing that central banks, and by extension taxpayers, should not assume the risks that banks willingly incurred.
Taxpayers are on the hook already in Germany, where IKB, the tiny German lender whose near-collapse last summer heralded the beginning of the financial crisis in Europe, warned it would have to write off another \590 million thanks to rapidly deteriorating market conditions.
IKBs principal shareholder, the state-owned banking group KfW, will kick in \450 million from a previously arranged credit line to recapitalize the bank, which has needed repeated bailouts to stay afloat over the last six months. IKB also announced it would post an \800 million loss for the fiscal year ending March 31, and make little or no profit in the coming years.
Dьsseldorf-based IKB speculated heavily in securities linked to the crisis-ridden U.S. mortgage market, to an extent that far outstripped the banks capacity for surviving significant market disruptions.
In mid-February, with KfWs ability to support IKB without harming its other activities increasingly in doubt, the German government stepped with a \1 billion payment to keep the bank afloat. A consortium of private banks, worried about the overall effect on the financial system, also kicked into what was by then the third bailout package.
IKBs troubles have had a political resonance in Germany, where criticism of the packaged hammered out last month was fierce. “There must be no further money from the federal budget,” Steffen Kampeter, budget policy spokesman for Chancellor Angela Merkels conservative Christian Democrats, told Reuters on Thursday.
Josef Ackermann, chief executive of Deutsche Bank, made waves in Germany earlier this week with his call for greater government action to wind down a financial crisis that has gathered momentum in recent weeks. “I no longer believe in the markets self-healing power,” Ackermann said.
He was quickly slapped down by Axel Weber, the president of the German Bundesbank, who said that the burden was on banks to come clean about their bad investments.
