NEW YORK Major central banks have now provided a set of flexible tools that will help reduce the risk that problems in the credit markets could affect the broader economy, New York Federal Reserve Bank President Timothy Geithner said on Thursday.
"These actions provide a more flexible and potentially more effective set of instruments ... to help mitigate the risks that liquidity pressures in markets ... could pose on the economy," he told a conference.
The Fed, the European Central Bank and the British, Swiss and Canadian central banks on Wednesday announced new or expanded measures to provide liquidity to the money market, where banks have had difficulties raising longer-term funds.
Geithner, speaking at the New York Fed-Princeton Liquidity Conference, said the measures would reinforce monetary policy actions by assuring market participants that they could raise funds, but do not directly address the issues of balance sheet or capital constraints that many banks face.
The conditions that prompted the credit crisis took time to develop and so would take some time to resolve, he said.
Financial conditions have been disrupted as the fallout from a downturn in the U.S. mortgage market has spread throughout the global financial system.
"As market participants have adjusted to what has been a very acute change in expectations about economic and credit risk, they have become more cautious in how they use their liquidity and capital," said the president of the New York Fed, which oversees Wall Street.
The Fed on Tuesday cut short-term interest rates again, thereby bringing the benchmark federal funds rate down by a full percentage point since mid-September.
"By adjusting policy proactively as the risk to the outlook changes, central banks can help reduce the probability of the extreme adverse outcome," he said.
"The actions to address liquidity issues ... can help reinforce our monetary policy actions by providing greater assurance for market participants of access to funding."
Geithner is also vice-chairman of the rate-setting Federal Open Market Committee.
The Fed's new lending facility may be more effective than the existing discount window where banks still perceive a stigma in borrowing funds, he said.
The Fed's said on Wednesday it will set up a new auction facility that will provide up to $40 billion by the end of the year. The first auction will be held on December 17, providing 28-day term funds.
This "Temporary Auction Facility" will be open to all depository institutions that are able to borrow under the discount window, and collateral will be the same as used to secure loans at that window.
Geithner said there are "some early steps" to bring new capital into the banking and financial system, which was a healthy development.
Regulators were working to influence how financial market participants manage liquidity risk, he said.
(Reporting by Tamawa Kadoya; Editing by James Dalgleish)