A group of 10 of the world's top banks have set up a $70bn (£39bn) liquidity fund to try to shore up confidence in the financial system after the collapse of Lehman Brothers.
Barclays, Goldman Sachs and Citigroup were among the lenders to commit $7bn each to the fund at the request of the US authorities. Each will be able to draw on up to a third of the funds in exchange for collateral.
The extraordinary move was part of a concerted attempt to boost confidence in the US financial system by showing that banks were prepared to act together to deal with the financial crisis. Markets stunned by the bankruptcy of Lehman were seen as in danger of descending into a general run on US financial companies by investors.
The US authorities refused to support a rescue of Lehman, unlike the stance they took in backing JPMorgan's takeover of Bear Stearns when it nearly collapsed in March. Hank Paulson, the Treasury Secretary, has told financial institutions they must take responsibility for finding a way out of the crisis. Barclays was the only UK bank to join the group, which includes Bank of America, Credit Suisse, Deutsche Bank, and Morgan Stanley. Others such as Royal Bank of Scotland were invited to make up the initial number and could join later if the facility is expanded. Sources said the fund may act more as a morale-boosting measure for markets rather than one on which the banks need to draw regularly.
The banks are working together to maximise liquidity in the market and to bring about an orderly resolution of derivatives exposures between Lehman and its counterparties. That effort included opening the over-the-counter derivatives market for trading on Sunday afternoon.
The fund was set up as the US Federal Reserve increased the supply of Treasuries it would lend to bond dealers by $25bn, taking the total to $200bn. The Fed agreed to lend to investment banks in the wake of the near-collapse of Bear Stearns, Lehman's smaller rival, in March. The Fed will now accept equities in its primary dealer credit facility as well as investment-grade debt. Collateral for its term securities lending facility, which auctions loans of Treasuries, will include all investment-grade securities.
"These initiatives will be critical to facilitating liquid, smooth functioning markets and addressing potential concerns in the credit markets," Mr Paulson said.
The other banks paying into the fund are Merrill Lynch, JPMorgan Chase and UBS.
MPs insist on guarantees for savers
The Government and City regulators must insist that victims of a UK banking collapse are compensated within seven days, a report from the Treasury Select Committee will insist today.
The MPs will say that the tripartite authorities must not allow banks' concerns about their ability to calculate what compensation customers are owed to jeopardise the seven-day deadline proposed as part of an overhaul of the Financial Services Compensation Scheme.
The MPs will also say that the scheme should be pre-funded, with banks contributing to the levy on the basis of their risk profile, but banks should be allowed to suspend contributions in times of crisis.
John McFall, the committee's chairman, backed proposals for the Financial Services Authority to determine when a failing bank should become subject to the Special Resolution Regime, the new scheme under which the management of such institutions would be taken over. But Mr McFall warned that a plan for a new Financial Stability Committee at the Bank of England would cause confusion, with plans for it to oversee the Bank's work but for it to be chaired by its Governor.Reuse content