Meeting of Governing Council of European Central Bank

Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank today announced measures designed to address elevated pressures in short-term funding markets.

The move comes following a return of credit turmoil in the banking markets ahead of the year end. There is also concern that commercial banks are curbing lending even to other lenders, raising concerns that this will hit global economic growth.

The plan creates a temporary short-term auction system to allow commercial banks another avenue to obtain funding. The first auction of $20 billion dollars will be held on Monday.

In Europe, Euribor 3-month rates rose to a new 7-year high of 4.953% Wednesday signalling that the credit crunch has intensified in recent weeks.

THe ECB said that the Governing Council previously decided on 8 November 2007 to renew at maturity the two supplementary longer-term refinancing operations (LTROs) that were allotted in August and September 2007. As an additional measure, the Governing Council decided on 13 November to lengthen the maturity of the main refinancing operation settling on 19 December 2007 to two weeks, thereby maturing on 4 January 2008 instead of 28 December 2007.

Federal Reserve Actions

Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee). 

Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window.  All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions.  All advances must be fully collateralized.  By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.

Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate).  The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008.  The second auction of up to $20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008.  The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays.  The amounts of those auctions will be determined in January.  The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions. 

Depositories will submit bids through their local Reserve Banks.  The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned.  The OIS rate is a measure of market participants’ expected average federal funds rate over the relevant term.  The minimum rate for the December 17 auction along with other auction details will be announced on Friday, December 14.  Noncompetitive tenders may be accepted beginning with the third auction.  The results of the first auction will be announced at 10 a.m. Eastern Time on December 19. 

The Fed said that experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve’s current monetary policy tools--open market operations and the primary credit facility--with a permanent facility for auctioning term discount window credit.  The Board anticipates that it would seek public comment on any proposal for a permanent term auction facility. 

The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB).  These arrangements will provide dollars in amounts of up to $20 billion and $4 billion to the ECB and the SNB, respectively, for use in their jurisdictions.  The FOMC approved these swap lines for a period of up to six months.