Fed pumps in £100bn to avoid another collapse

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The US central bank, led by Ben Bernanke, said today it is increasing the availability of short-term US dollar funding into the market via central banks around the world such as the Bank of England.

This was to make sure lending in dollars, including to and between US investments banks, does not dry up and force a Lehman Brothers-style collapse or an emergency forced sale like Merrill Lynch or Bear Stearns.

In the latest step-up in intervention, the Fed has made $40 billion available into the London money market through the Bank of England.

Similarly the European Central Bank is being used as a conduit for a further $55 billion, the Bank of Japan $60 billion, the Swiss National Bank $15 billion and the Bank of Canada $10 billion.

Sources said this was to ensure institutions dealing in US dollar-denominated money can continue to do business with each other.

In a statement the Fed said: "This is designed to address the continued elevated pressures in US dollar short-term funding markets.

"These measures together with other actions taken in last few days by individual central banks are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures."

"There's a complete lack of faith in the markets," said Jim O'Neill. chief economist at Goldman Sachs.

"There's a lot of cash hoarding and people losing trust in banks so the central banks are acting to relieve that. This might not be the last time they have to act."

The move appeared to have an immediate effect, with the dollar overnight borrowing rate falling from more than 5% yesterday to 3.84%.
The overnight borrowing rate ahead of this week's latest crisis was 2.15%.

The Fed money is being made available through "swap lines" first set up between the US central bank and its global counterparts last December to boost dollar flows. "The lack of dollars has been making the financial crisis worse around the world, which is why we now have this co-ordinated response," said Credit Suisse economist Robert Barrie.