Monday, September 29, 2008

Liquidity Is Still A Huge Issue

From Marketwatch:

The Fed said it was boosting the size of its dollar swap arrangements to $620 billion from $290 billion previously. The agreement, with nine central banks, allows authorities to provide short-term dollar loans to commercial banks in an effort to ease short-term funding woes that have resulted from reluctance by commercial banks to lend short-term funds to each other through the interbank market...

"Market participants are reluctant to engage in transactions with each other because of heightened counterparty risk and fear that they could be the next in line to experience a 'bank run' and therefore need all the liquidity they can get themselves," wrote economists at Danske Bank in Copenhagen.

Such fears left Bradford & Bingley and Fortis struggling for funding. Their subsequent collapse then contributed to further tensions in the money market.Amid the money-market tensions, central banks have been "forced to get more and more active in providing liquidity to the market because the market isn't doing it internally," said Don Smith, an economist at brokerage firm ICAP.

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