Central banks try new methods amid market mayhem

By Wayne Cole

SYDNEY (Reuters) - Central banks across Asia stepped up to offer more support to commercial banks on Wednesday, to try to ease painful pressure on funding costs from a vicious global credit squeeze.

Just a day after it slashed interest rates by the most in 16 years, Australia's central bank expanded the types of collateral it would take for loans to banks and greatly lengthened the period for which it would lend.

The Bank of Japan leant a further $20 billion to a dollar-hungry market and Hong Kong chopped the borrowing rate it charged banks by a full percentage point. There were also reports China might soon cut its interest rates.

The Federal Reserve took the radical step of lending to companies directly and signaled a new readiness to ease U.S. interest rates.

And the UK government was expected to announce a 50 billion pound bailout of its banking system on Wednesday, after shares at some institutions feel up to 39 percent the day before.

Yet, all this furious activity could not prevent share markets across Asia from slumping as worries grew that nothing the central banks could do would head off a global recession.

"Governments around the globe are very active and aggressive in providing liquidity to markets but it's not going to fix the problem we have right now which is high interbank lending rates," said Craig Saalmann, a credit strategist at JPMorgan in Sydney.

"It is a market solution that is going to sort this out, not a government or central bank intervention," he argued.

SCARED STIFF

With banks still too scared to lend to one another, the London Interbank Offered Rate for borrowing dollars for three months had climbed to 4.32 percent on Tuesday. That was far above the 2.8 percent level held just a month ago, making it prohibitively expensive for banks to find funding.

Overnight dollar rates jumped to between 4 percent and 5 percent in Singapore and as high as 6.5 percent in Kuala Lumpur, compared with 2-3 percent cited by traders in Asia on Tuesday.

The rise was all the more worrying as it came despite an extraordinary expansion of credit by the central banks. Analysts at BNP Paribas noted the Federal Reserve alone had expanded its balance sheet by an astonishing 49 percent in the past three weeks, taking its assets to $1.39 trillion.

It also broke with tradition to lend to companies directly by buying unsecured commercial paper.

"This is very important, because it means that the Fed has crossed the Rubicon of unsecured lending," said Stephen Stanley, chief economist at RBS Greenwich Capital.

From there, it was just a step to making unsecured loans directly to banks, he said.