As the global reel under the escalating pressures of the financial market turmoil, the world's leading central banks launched a joint emergency action to boost dollar liquidity. Others took individual measures to calm the edgy markets.

Thursday, the US Federal Reserve along with the Bank of Japan, the Bank of England, the European Central Bank, the Bank of Canada, and the Swiss National Bank announced joint efforts to deal with the sustained elevated pressures in U.S. dollar short-term funding markets.

The Fed provided an extra $180 billion to the other central banks involved via its temporary reciprocal currency arrangements or swap lines, valid through January 30, 2009. This increased capacity is intended to provide dollar funding for both term and overnight liquidity operations by the other central banks.

The central banks said the latest efforts together with actions taken by individual central banks over the last few days are intended to improve the liquidity conditions in the global financial markets. They will continue to work together closely and will take appropriate steps to address the ongoing pressures, the central banks said.

The Fed revealed that it is raising existing provisions in the swap lines with the ECB and the SNB. The provision of U.S. dollar liquidity for ECB will be increased by $55 billion, totaling up to $110 billion, while for the SNB, the funds supplied will be up to $27 billion, an increase of $15 billion.

In reaction to the joint announcement by the world central banks, the cost of borrowing funds dropped to 3.84% from 5.03% yesterday, in the interbank lending market.

The actions are in response to the crisis at U.S. financial firms, which took excessive bets on mortgage-backed investments resulting in the write off of billions of dollars of assets. On Monday, the troubled U. S. investment bank Lehman Brothers revealed that it is filing for Chapter 11 Bankruptcy protection. Also, Bank of America said it agreed to acquire the investment bank Merrill Lynch in a quickly-negotiated $50-billion transaction. Late Tuesday, the U.S. government stepped in to save insurer AIG from sinking. The Fed extended an $85 billion loan, essentially nationalizing the firm.

The ECB added an overnight maturity to its operations to supply US dollar funding to Eurosystem counterparties, which will be conducted under a variable rate tender procedure. Additionally, the central bank also increased the funds offered in the Term Auction Facility operations. The Fed will provide up to US$40 billion under the swap line.

For the Term Auction Facility operations, the ECB increased the amount of US dollar liquidity provided to the counterparties of the Eurosystem to US$25 billion for the 28-days maturity operations, and to US$15 billion for the 84-days maturity operations. Overall, the dollar funding operations conducted by the Eurosystem could reach an outstanding amount of US$110 billion, compared to the current US$50 billion, the ECB said.

On Thursday, the ECB allotted $40 billion at a marginal rate of 4%. The total number of bidders were 61 and the total bid amount was $101.675 billion. Additionally, the central bank alloted EUR25 billion in one-day money at a marginal rate of 4.3%.

The SNB said it will now hold US dollar repo auctions with a term of 1 day (overnight) on a daily basis for an amount of up to US$10 billion. Further, the SNB will also increase the volume of the previous auctions with a term of 28 days to US$8 billion and for auctions with a term of 84 days to US$9 billion from US$6 billion each.

The Swiss central bank said these auctions will be held once every two weeks on an alternating basis as before. The maximum total amount outstanding for all terms is now stands at US$27 billion, as compared to the previous US$12 billion. Taking the market situation into account, the Swiss central bank said it intends to make US dollar liquidity available for as long as it considers this to be necessary. In Switzerland, the banks bid just $10.17 billion for the offered amount of $10 billion.

Later in the day, the SNB said it is continuing its generous and flexible provision of liquidity to the Swiss franc money market, while announcing its decision to leave the key interest rate unchanged at 2.75%.

Further, the Fed announced new swap facilities with the Japanese, British and Canadian central banks. Accordingly, these facilities will support the provision of U.S. dollar liquidity in amounts of up to $60 billion by the Bank of Japan, $40 billion by the Bank of England, and $10 billion by the Bank of Canada.

The BoJ announced that it has concluded a US$60 billion swap agreement with the U. S. Federal Reserve at an unscheduled monetary policy meeting to ensure smooth functioning of the money market and ensure stability in financial markets. The Fed will supply funds under the agreement "appropriately in view of the prevailing market conditions", the Japanese central bank said.

The central bank also said it decided to introduce U.S. dollar funds-supplying operations against pooled collateral to provide U.S. dollar funds to market participants in Japan.

Separately, the BoJ announced that the Policy Board decided to leave the uncollateralized overnight call rate unchanged at 0.5%. Policymakers had voted to leave the base rate unchanged at 0.50% at the conclusion of its regular two-day monetary policy meeting a day earlier.

Earlier in the day, the BoJ had injected 2.5 trillion yen into financial markets. The central bank has added a total of 8 trillion yen to the system this week to calm markets in the wake of worrying developments on the Wall Street.

The Bank of England decided to lend each day US dollar funds overnight against eligible collateral and offered $40 billion in a repo operation today, but the total bid amount came up to just $14.05 billion. In a separate open market operation, the central bank allotted GBP66.21 billion.

Ever since the grim developments on the Wall Street shook the world financial markets at the start of the week, global central banks have stepped in with individual efforts to boost liquidity. Central banks in Australia, Hong Kong, Norway and India reportedly pumped additional funds to their respective financial markets earlier in the day. The Reserve Bank of Australia added A$3.02 billion to the financial system, after pumping A$4.285 billion yesterday.

In Russia, the government pledged a massive 500 billion roubles to ensure stability in financial markets on Thursday. The Chinese government also announced certain policy moves to support markets.

Further, central banks in Taiwan and Indonesia announced policy rate changes this week amid the crisis in the financial markets.

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