Central Bank Loans Pump $76.2 Billion Into Markets

By Brian Swint

Sept. 22 (Bloomberg) -- Central banks in Frankfurt, London and Zurich kept up their dollar auctions for a third day as part of coordinated action with the Federal Reserve to provide liquidity to financial markets.

The European Central Bank, the Bank of England and the Swiss National Bank allotted $76.2 billion out of $90 billion on offer in emergency overnight funds. The U.K. central bank distributed less than the $40 billion on offer, while the ECB and SNB said banks bid for more money than they auctioned. Today's funds replace $70.8 billion in overnight loans maturing today.

The central banks sought to soothe money markets after last week's collapse of Lehman Brothers Holdings Inc. and the U.S. government's takeover of American International Group Inc. threatened to derail financial markets. That led to the unveiling of the Bush administration's $700 billion dollar rescue plan to restore confidence.

``It would be wrong to say dollar markets are functioning normally but these are difficult times and central banks have injected a huge amount of liquidity,'' said Philip Shaw, chief economist at Investec Securities. ``I think it is having an effect of some sort. Things do look considerably calmer than last week.''

The overnight rate for lending between banks in dollars fell to 2.97 percent today from 3.25 percent on Sept. 19, the British Bankers' Association reported in London.

Japan, U.A.E.

The United Arab Emirates central bank set up a 50 billion- dirham ($14 billion) fund for banks operating in the country to help ease liquidity constraints today. The Bank of Japan said it will auction dollars on Sept. 24, lending $30 billion for one month and plans to conduct four other dollar operations this year.

The Bank of England allowed bids of 20 percent of the total on offer today, twice the size permitted in previous auctions. The bank also disclosed that it received 5 billion pounds ($9.2 billion) in overnight funds on Sept. 19, the first use of its deposit facility in more than a year and the most since it revamped its money market operations in May 2006.

The ECB said the average rate for the overnight dollar loans, which were set up with a swap line with the Fed last week, was 3.25 percent. The average rate in the U.K. was 2.06 percent, and the minimum bid accepted was at 0.01 percent. The SNB loaned dollars at an average rate of 2.72 percent.

The Federal Reserve's Open Market Committee kept its target overnight lending rate at 2 percent on Sept. 16.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.