The European Central Bank (ECB) announced on Sunday a special 38-day loan to provide eurozone banks with more cash in a bid to balance conditions on extremely tense interbank money markets.
The announcement came shortly before the British government announced that it had nationalized a second bank, Bradford and Bingley.
The amount of the ECB operation was not specified, but the central bank said in a statement that it “will continue to steer liquidity towards balanced conditions” in an attempt to bring short term interbank interest rates in line with the bank’s own minimum rate.
“The special term refinancing operation will be renewed at least until beyond the end of the year,” it said.
The comments appeared to be aimed at calming troubled markets which have seen tension increase as the end of the third quarter drew near.
The operation announced yesterday will run until Nov. 7, but is likely to be rolled over if chronic market tension persists.
Commercial banks usually lend and borrow cash on interbank money markets but these have come under severe pressure since the US market for high-risk, or subprime, mortgages collapsed more than a year ago.
The ECB and other major central banks have been pumping hundreds of billions of dollars, euros, pounds and other currencies in the form of loans into such markets in order to ease turmoil stemming from the crisis in the US financial sector.
In Britain, the government confirmed that it was nationalizing the troubled bank Bradford and Bingley, the second British bank to be saved in such a fashion after Northern Rock.
Major central banks agreed last week to inject billions more dollars into money markets that have been battered by the chronic crisis.
The focus is on getting banks over the end of quarter period, when they typically seek to beef up their cash holdings.
In December, the ECB, US Federal Reserve and other central bank scrambled to avert a crisis when commercial banks getting set to close out their books for the year sent money market rates soaring.
Some analysts question however, whether the central bank moves will work, saying that commercial banks soak up the extra cash but still do not lend to each other or extend it as credit to businesses.
Rather, they may be using some of the funds to buy government treasury bills because they are presently considered one of the safest investments.
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