Banks act amid new crisis warning

15 September 2011 Last updated at 11:04 ET

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Five central banks have moved to boost the liquidity of commercial lenders, as the boss of the International Monetary Fund warns of a “dangerous” new economic phase.

The central banks are to provide the commercial banks with three additional tranches of dollar loans to help ease funding pressures.

Banking stocks rose sharply, with BNP Paribas up as much as 22%.

IMF managing director Christine Lagarde said “bold action” was needed.

Speaking in Washington, she said: “Uncertainty hovers over sovereigns across the advanced economies, banks in Europe, and households in the United States.

“Without collective, bold, action, there is a real risk that the major economies slip back instead of moving forward.”

Three-month loans

The move by the Federal Reserve, Bank of England, European Central Bank, Bank of Japan and Swiss National Bank follows fears about the exposure of banks – primarily those Europe – to eurozone sovereign debt.

This concern has made European banks reluctant to lend to each other, creating the risk of short-term funding problems for those most exposed.

European banks and their American counterparts have been moving funds out of Europe in recent months because of these exposure fears, worsening the liquidity problems in the eurozone banking system.

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The new loans are being issued in dollars, because European banks can already access additional euro funds from the European Central Bank.

The UK’s FTSE 100 index was up 2.1%, while Germany’s Dax added 3.5%, and France’s Cac advancing 4.4%. Wall Street’s Dow Jones rose 1% in early trading.

The three additional three-month loan offers will be conducted in October, November and December.

French banks have posted the biggest rises following the announcement, as they are the most exposed to sovereign debt in Greece and other heavily indebted eurozone nations.

Credit Agricole and Societe Generale were both 11% higher and Natixis was up 7.8%.

On Wednesday, Credit Agricole and Societe Generale each had their credit ratings downgraded by rating agency Moody’s, after it reviewed their exposure to Greek debt.

Moody’s also said it would keep BNP Paribas on review for a possible downgrade.

In the UK, shares in Lloyds Banking Group were trading 6% higher following the announcement by the central banks, while Barclays was up 5.3%.

Analysts have welcomed the move by central banks, but warned that more will still have to be done to tackle the underlying problem of high levels of eurozone sovereign debt.

“The stress is still there as long as sovereign debt issues aren’t dealt with aggressively, but this move eases short-term funding problems,” said Peter Boockvar, equity strategist at Miller Tabak in New York.

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