European Central Bank Pumps $500 Billion into Banking Systems

By Mike Caggeso
Associate Editor

Seeking to loosen global credit markets, the European Central Bank (ECB) pumped $501.5 billion into banks yesterday (Tuesday), adding liquidity and easing the cost of lending.

The rate for two-week loans dropped 50 basis points to 4.45%. That rate had spiked to 5.28% in the past two weeks, as banks froze cash anticipating a continued credit squeeze until the end of the year, the International Herald Tribune reported. Rates for one- and three-month loans also dropped.

"These are strong-arm tactics intended to show the market they're seriously committed to breaking the deadlock," Marc Ostwald, a fixed-income strategist at Insinger de Beaufort Holdings SA in London, told Bloomberg News. "The ECB is helping to bankroll banks out of a problem that they themselves created."

The cash injection marks the second time in two weeks that central banks intervened to save lenders from the continued credit fallout. Last week, U.S. Federal Reserve Chairman Ben S. Bernanke cut the Fed's key interest rate 25 basis points to 4.25% - the third rate cut in four months. The Fed followed up yesterday (Tuesday) with stricter rules to stop subprime mortgage lenders from doling out loans to unqualified borrowers.

More pertinent to Europe's economy, the ECB's liquidity boost comes on the heels of a massive $10 billion write-down last week from UBS AG (UBS), Europe's fourth-largest bank.

Also last week, Forbes reported predictions that several other European banks will be facing write-downs: $4 billion for Deutsche Bank (DB), $3.2 billion for Societe Generale (SCGLY), $1.7 billion for Credit Argicole (CRARF), and a $1.4 billion write-down for Credit Suisse (CS).

And two weeks ago, Royal Bank of Scotland Group PLC (RBS), the U.K.'s second-biggest bank, announced it would write-down $3 billion.

If banks instill smarter lending habits and use this $500 billion wisely - and that's a big if, considering what happened this year - it will help to stabilize their balance sheets and regain the trust of stockholders and the ECB.

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