Bank of Canada pumps billions into system

Bank of Canada pumps billions into system

HEATHER SCOFFIELD
Friday, October 03, 2008

OTTAWA — The Bank of Canada is substantially bulking up its liquidity injections, increasing their frequency and making it easier for financial institutions to partake - measures that aim to manage near-frozen conditions in money markets.

The central bank said it is increasing its plans to inject extra cash into term lending markets from $8-billion, announced recently, to $20-billion.
The extra securities will be made available more frequently, on a weekly basis, until at least the end of the year, the bank said in a statement on its website. Plus, the bank will announce well in advance the minimum amounts that will be made available.

“In light of persistent pressures in these markets, the Bank announces additional steps to provide term liquidity,” the bank explained.
The Bank of Canada also added an additional $830-million to the overnight money market Friday morning.

The central bank also said it is expanding its list of eligible collateral, again. “In recognition of market conditions,” it will now take bank-sponsored asset backed commercial paper, in addition to other securities recently added to its list of acceptable collateral, the bank said.
“The Bank will continue to provide term liquidity as long as conditions in financial markets warrant,” the statement concluded.

The announcement marked a dramatic escalation of the central bank's liquidity measures, with the Bank of Canada moving in tandem with central banks around the world to bolster money markets that have become paralyzed by fear.

The Canadian central bank has not been as active as others in the overnight money market, with intervention only needed sporadically -- albeit it intervened both Thursday with $610-million and Friday with $830-million so far.

But the “term” money market - involving one-month and three-month securities, among others - has required more and more support in Canada.

Already on Monday of this week, the central bank doubled its 28-day injection from $2-billion to $4-billion, pushing its total extraordinary measures to $10-billion from $8-billion.
Now, the bank's amounts have soared across the curve, in the hopes of bringing down spreads and diminishing risk aversion.

Money markets around the world were at a standstill on Friday, with banks refusing to lend to each other as they kept on an eye on the U.S. House of Representatives to see if it would pass the $700-billion (U.S.) bailout bill.

So-called “term” funding of one month and beyond remains mostly expensive and scarce because banks prefer to hoard cash to bolster battered balance sheets than lend to counterparties they fear may be in severe financial distress.

Canada has been no exception, with spreads rising substantially over the past few days, and signs that investors and financial institutions would prefer to hold government-backed treasuries over everything else. The spread between Canadian interbank lending rates and government-backed securities is now above 100 basis points, up from a normal range of 10.
Some analysts had hoped that money market spreads would relax somewhat after Sept. 30, since that's quarter end for many financial institutions and typically a time of high demand for short-term securities. But the end of the month has come and gone, and spreads are still breaking through record highs.

The passing of the U.S. financial rescue plan could come later on Friday and would help shore up confidence across financial markets. But many measures of deteriorating credit conditions, such as interbank premia over expected policy rates and swaps spreads, remained at extreme levels.
“Lower (interbank term) rates would be helpful overall for the economy, and it's disappointing that central banks can't engineer lower rates,” Ciaran O'Hagan, senior strategist at Societe Generale in Paris told Reuters.

“There's a big focus on spreads, but that's not as relevant for the economy as the level of rates. The more serious thing is the rationing of credit ... especially to the non-financial sector,” he said.
Massive central bank cash injections have helped keep trading going on an overnight basis since confidence collapsed with the demise of Lehman Brothers and subsequent rescue of several European banks.

The Bank of Japan injected $7.6 billion in an over-the-weekend operation on Friday to provide funds to foreign banks struggling to secure cash from Japanese lenders.
Australia's central bank added $1.2 billion in repurchase agreements, way above an estimated daily need of $1.195 billion.
The Bank of England auctioned $10-billion overnight money and $30-billion of one-week cash, while the European Central Bank auctioned $50-billion of three-day funds and threw open the doors for thousands of banks to access its so-called 'fine-tuning' operations for overnight auctions.
The ECB left its benchmark interest rate on hold at 4.25 per cent Thursday but highlighted the risk to the European economy from the credit crunch, suggesting the first euro zone rate cut in five years was on the cards.
Financial markets now expect a rate cut at the ECB's next meeting and a further two cuts to 3.50 per cent by February.
In the United States, there was no relief for the commercial paper market. Outstanding paper slumped by $94.9-billion to $1.607-trillion, Federal Reserve data showed, bringing the cumulative shrinkage to $208-billion in the past three weeks.
Fed data also showed banks borrowed a record $367.8-billion from the central bank in the latest week.
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