Tokyo / Sydney: Central banks in Japan and Australia moved on Monday to try to instil confidence in their markets and the wider financial system as Lehman Brothers headed towards a bankruptcy filing.
Market participants were waiting to see if the European Central Bank, the Bank of England and other central banks would take any similar action after Lehman filed for Chapter 11 bankruptcy.
Lehman’s move follows three days of crisis talks at the New York Federal Reserve Bank in which US authorities declined to put taxpayer funds on the line to prop up the loss-making bank.
The US Federal Reserve launched a series of emergency measures to calm markets in case the Lehman news sparked a fresh wave in the global credit crisis, including its acceptance of equities as collateral for cash loans at one of its special credit facilities.
Lehman’s woes raised concerns about other financial firms. In a hectic weekend of activity, Bank of America agreed to acquire Merrill Lynch & Co Inc for $44 billion and insurer American International Group Inc approached the Fed for $40 billion of short-term financing.
Ten of the world’s biggest banks committed to establish a $70 billion borrowing facility to bolster global liquidity.
The unprecedented corporate activity prompted stocks and the dollar to fall sharply as investors jumped into the perceived safe haven of bonds and gold.
A source at the Bank of Japan said on Monday it was watching market developments and working together with the Federal Reserve and authorities elsewhere.
“We are monitoring financial market conditions while in contact with the Fed and authorities from other countries,” the source told Reuters on condition of anonymity.
Financial markets are closed in Japan to mark a public holiday.
The Reserve Bank of Australia provided the banking system with more money than its estimated need on Monday after the havoc in the financial world sent interbank rates higher across the globe.
In its regular daily money market operation, the central added A$2.1 billion ($1.7 billion) in cash. That was well above the market’s estimated need of A$828 million, implying that commercial banks’ cash balances with the bank would expand.
Traders said the extra cash would help ease funding pressures in the system, where rates were up and credit spreads wider after rescue talks for Lehman came to nothing.
With banks hoarding money, the spread between three month bank bill rates and three-month overnight index swap (OIS) rates widened to its biggest in six weeks at 54 basis points, up from 44 basis points on Friday.