Experts doubt liquidity easing efforts

As central banks stepped up efforts to mitigate the liquidity problems among banks which have nearly frozen their inter-bank lending operations, doubts are cast whether the sustained liquidity injections are delivering the desired results, analysts said.

Over the last many months, central banks in Europe and the United States have pumped hundreds of billions of dollars to ease the worsening credit crunch that arose in the wake of housing meltdown in the US.

The underlying goal is to ensure that banks have sufficient credit in the face of frozen inter-bank lending which is bringing financial markets to a screeching halt.

That policy is yet to deliver dividends, said a banker in Geneva. But banks are choosing to place their deposits with central banks instead of participating in the inter-bank lending where rates are higher.

This has caused a piquant situation for central banks which have taken bigger risks to rescue banks and other financial institutions. Many banks in Europe are now forced to cope up with rising rates in the day-to-day dollar-denominated London inter-bank rates which has touched a new high of almost 7 per cent from 3 per cent. In effect, the cost of borrowing overnight dollars on global money markets touched a new high on Tuesday despite the central banks’ intervention following the US lawmakers rejection of a $700-billion financial rescue plan.

Faced with scarcity of funds in the inter-bank market, banks were forced to borrow ¤15.481 billion overnight from the ECB, the highest in the last six years. According to analysts, this suggests that central banks’ attempts to inject liquidity in the markets are yet to pay dividends with banks still preferring not to lend to other banks.