ECB injects $500 bn into banking system : Moneycontrol.com

ECB injects $500 bn into banking system

ECB has injected USD 500 billion into the banking system, reports CNBC-TV18.
Agencies also reported that money market rates tumbled after ECB fund injection.

The rates charged by banks for two-week loans are down a record 50 bps at 4.45%. US stock-index futures have risen 0.75% after the cost of borrowing euros crashed.

The European Central Bank has injected an unprecedented USD 500 billion into the banking system as part of a global effort to ease the gridlock in the credit market. The amount banks charge each other for two-week loans in euros dropped a record 50 basis points to 4.45%, after climbing 83 basis points in the past two weeks.

This unprecedented infusion of cash is because normally the cash that is infused is only an overnight tenure and these are called repos because they are normally for temporary mismatches that banks might face. This is a 16-day loan, which means that the loan given today will have to be repaid on January the fourth which is the 16 working day loan that the ECB is giving. The commercial banks in Europe and in the US usually don’t want to lend over the year-end. This is normal phenomenon at the quarter end or the year-end and there is a hesitation to lend loans because you will have to find extra capital.

The move is to restore confidence in the money markets after the US subprime crisis. Central banks, led by the Federal Reserve, are seeking to restore confidence to money markets, after the collapse of the US subprime-mortgage market. The ECB loaned a greater than anticipated USD 501 billion for two weeks at 4.21% today.

Capital is a rare commodity or scarce commodity in the global central banks because their assets have eroded really badly because of the subprime crisis. So more capital is needed to sure up the same amount of loans. At such a juncture, people are simply not willing to lend year-end loans because if they lend loans now they have to find more capital to back up those loans.

So loans are simply not being lent. There is just no transaction and therefore if there is any odd commercial bank, which wants money, it has to pay higher and higher rates. This is the reason why the money market rates over the last one-week was rising by nearly 83-bps- which is 1 percentage point higher for just a two-week loan or a three-week loan.

The long-term effect will be next to nothing because all these loans mature in two-weeks and in the case of the Fed, they mature in a month or so. So there will be no impact on inflation at all because of this higher liquidity. This is clearly only to break a year-end gridlock that banks normally face in this particular year.



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