Central Banks Unite to Aid Global Money Markets

The Federal Reserve, the European Central Bank and other central banks massively escalated the assistance offered to global money markets on Thursday, coordinating efforts to ease funding constraints stemming from the financial turmoil emanating from Wall Street.

The Fed said in a statement that it had authorized a $180 billion expansion of its temporary reciprocal currency arrangements, known as swap lines, to allow banks to borrow more dollars in markets at a lower rates.

"This is clearly a very significant help and central banks are showing decisive leadership here as risk aversion is hitting the private sector," said Julian Callow, chief European economist at Barclays Capital in London.

The Fed also authorized increases in the existing swap lines with the European Central Bank, up to $110 billion from $55 billion, and the Swiss National Bank, up to $27 billion from $15 billion.

New swap facilities were established by the Fed with the Bank of Japan, for $60 billion; the Bank of England, for $40 billion; and the Bank of Canada for $10 billion.

"The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures,'' the ECB said in a statement.

The concerted action followed sharp drops in financial markets amid fears of more Wall Street failures during a week that saw Lehman Brothers file for bankruptcy, Merrill Lynch sell itself to Bank of America and an $85 billion bailout of the insurer American International Group.

At the same time, banks had drastically slowed their lending to each other via the money markets as the short rates at which they borrow surged and they sought to keep cash on their books, fearful that loans might not be repaid.