Global central banks extend lifeline to credit markets

By Mark Felsenthal and Krista Hughes

WASHINGTON/FRANKFURT (Reuters) - The Federal Reserve joined two European central banks on Friday in expanding programs to spread more cash through the banking system in hopes of restoring confidence in credit markets.

The Fed said it would increase the size of cash auctions to banks, while the European Central Bank and the Swiss National Bank will boost their auctions of U.S. dollar funds.

In addition, the Fed said it would widen one of its lending programs to allow big bond market firms to swap a broader array of hard-to-trade securities for top-rated and liquid U.S. Treasury debt.

"They're trying to target their actions," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey. "I don't think this will be the last move either. They'll continue to look to restore markets to the conditions they were before the crisis."

Credit markets have not operated normally since rising defaults on U.S. subprime mortgages touched off a full-blown credit crisis in August, as banks shrank from lending to each other because they were worried about taking on toxic collateral.

Central banks, in turn, have unleashed extraordinary measures to return lending to normal.

The deep downturn in the U.S. housing market and subsequent credit tightening spurred the Fed to cut interest rates sharply to buffer the economy. Then on Wednesday it trimmed rates by a modest quarter percentage point and suggested it would now step to the sidelines to see if the medicine works.

The Fed's announcement on Friday signals policy-makers feel they need to rely on measures besides rate cuts to calm markets and get at the problems besetting the economy.

UNSTICKING THE MARKETS

Beginning next week, the central bank will begin accepting top-rated asset-backed securities as collateral in its auctions of Treasury securities for Wall Street firms. The move aims to increase liquidity in the market where student loans, auto loans and credit card receivables are securitized.

Financial firms and some lawmakers in Washington had urged the Fed to take the step to try to free up credit for student loans. Share of student lenders rose on the news.

"The wider pool of collateral should promote improved financing conditions in a broader range of financial markets," the Fed said.

In addition to the steps taken by the Fed, ECB and SNB, the Bank of England said it will allow British banks to hold more funds at the central bank to give it greater scope to provide liquid funds to financial markets on any given day.

The slew of measures follow a steady increase in the interest rates banks charge each other. London interbank offered rates, a gauge of market interest rates, are well above official central bank-set borrowing costs.

The U.S. central bank said it was increasing to $75 billion from $50 billion the amounts offered in the short-term cash auctions it holds for banks every two weeks, beginning with an auction on May 5.