American regulators may have to continue offering emergency funding to investment banks into 2009, Ben Bernanke, chairman of the US Federal Reserve, said yesterday, with the credit crisis showing no sign of easing.
Mr Bernanke said the Fed was committed to ensuring financial stability and that it would do whatever it could to get on top of the credit crisis. "We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end."
That would mean leading investment banks could continue to borrow from Fed facilities that offer hundreds of billions of dollars at reduced rates of interest if they find themselves constrained by liquidity problems. While Wall Street banks have made fewer calls on these facilities in recent weeks than when the funding was first offered, interbank interest rates remain significantly higher than US base rates, indicating that the credit squeeze is continuing.
Mr Bernanke's offer will be welcomed by Wall Street, but it reflects the limited impact regulators have had so far in dealing with the credit crisis since it began to bite a year ago.
"The presumption was that [the Fed was] going to wind down the lending programmes if, and only if, credit conditions improve – obviously that has not been the case," said William O'Donnell, director of interest rate strategy at UBS Securities. "Money has become dear despite their efforts. The problems seem to be elevated and are actually creeping higher."
The Fed first began offering investment banks access to its emergency funding facilities in March, on the day that it stepped in to prevent Bear Stearns from going under. The facility, previously only available to commercial banks, was originally intended to stay open only until September, but the Fed has indicated in recent weeks that conditions in the credit markets remain exceptionally tight.
A series of interest rate cuts have also had little effect on the cost of borrowing in the wholesale money markets, and the Fed was forced to abandon this policy earlier this month, keeping rates on hold in the face of concern about rising inflation.
Mr Bernanke's comments boosted the US stock market, with the Dow Jones closing up 152.3, or nearly 1.4 per cent, at 11,384.21. It had earlier risen by 40 points, helping to stabilise share prices in the UK, which recovered having fallen into "bear market" territory – 20 per cent down on their peak – yesterday morning.
The timing of the Fed chairman's offer was also significant because the US market, as measured by the S&P 500 index, also came very close to bear-market status on Monday, falling 19.9 per cent as financial companies were hit by credit crunch-related fears.
However, the fragility of the US economy was underlined by new figures suggesting the American housing market has not yet begun to recover. The National Association of Realtors (NAR) Index, which records home sales agreed but not competed, fell by almost 5 per cent in May, twice as steeply as economists had expected.
The data was particularly disappointing because several housing market indicators published last month had been interpreted as offering the first inkling that the US residential property sector had bottomed out.
Lawrence Yun, the NAR's chief economist, warned: "The overall decline in contract signings suggests we are not out of the woods by any means."
Mr Bernanke also said yesterday that the Fed was continuing to explore ways in which it could become more actively involved in policing the activities of American banks. US regulators are currently debating proposals for new banking regulations, likely to come into force next year, including powers for the Fed to liquidate "systemically important" investment banks on the verge of bankruptcy.Reuse content