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A Letter to the Editor by Ana Muñoz Garrido (Av2 MON, 2008-09) - 250 words

Dear Editor,

The purpose of this letter is to add some considerations about banks that I think you ignore in your article published in The Sunday Morning Herald on October 10.

Demersed in this deep financial crisis, the fact that banks feel fear to lend money on interbank markets is perfectly understandable. I can understand that this is a very important problem in a capitalist system, which subsists on the basis of trust and confidence. If it comes to it, I can even accept the perversion I perceive in the system when the European Central Bank (ECB) hurries to rescue European banks. But what I cannot understand is the unbounded grasp of banks, which are not using millions properly.

The ECB is lending banks large quantities of money. The problem is these banks keep the money instead of using it to reactivate the capital flow. In this way, banks are not only damaging the system: they are perpetuating the financial collapse. Banks are not saving "minimum reserve requirements", as the article states. Recently published research holds that banks are depositing half of the funds the ECB lends them.

Summing up, if the final objective of refinancing operations is to encourage banks to lend money to families to stimulate consumption and revive the Economy, maybe governments all over the world and the ECB are not doing things right.

These days, many bank managers are claiming "losses." To my knowledge, it is not the same to earn less money than to lose money. Dear managers: you are always earning money, even in a crisis.

Sincerely,
[Name]

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Article (from The Sunday Morning Herald)

ECB gives eurozone banks cash access

10th October 2008

The European Central Bank has hauled out new ammunition in the global battle to prevent financial collapse, giving eurozone banks unlimited access to cash until at least late January 2009.
The ECB's first six-day loans under the new regime generated requests for 24.68 billion euros ($A50.79 billion), a statement said on Thursday, a restrained response compared with banks' recent demands for cash.
An ECB statement had announced late Wednesday unlimited weekly euro loans at a new benchmark rate of 3.75 per cent that stemmed from an exceptional joint central bank intervention aimed at softening an impending economic downturn.
The ECB will "satisfy all demands of counterparties, ie full allotment" during refinancing operations at the new rate, it said.
Refinancing operations take place at regular intervals and allow commercial banks to meet minimum reserve requirements, meaning they have cash to back up lending operations.
An ECB spokesman told AFP that the last time the bank had resorted to such extraordinary measures was just after the international financial crisis erupted in August 2007.
The practice will continue "for as long as needed," and at least until January 20, 2009, the bank's statement said.
That would tide commercial banks over a crunch period in late December when they square their year-end books.
In another moved aimed at soothing extreme tension on crucial money markets, the ECB pumped $US100 billion ($A150.76 billion) into them in one-day loans on Thursday, doubling the amount offered just two days earlier.
Money markets determine the availability of credit for hundreds of millions of people around the globe, from managers trying to fund businesses to families and students seeking mortgages and personal loans.
Commercial banks generally lend and borrow cash from each other on interbank markets but these have dried up since the US market for high-risk, or subprime, mortgages collapsed more than a year ago.
The ECB decision to make euro loans in unlimited amounts was accompanied by other measures aimed at calming the credit markets.
Commercial banks will now pay less for the ECB overnight euro loans they can get at any time, while the rate paid to them for funds deposited with the central bank will remain the same.
The second rate would normally have fallen when the benchmark lending rate was cut on Wednesday from 4.25 per cent
For Commerzbank analyst Michael Schubert, the new measures "will further stabilise short-term rates" on the credit markets.
"However, it remains to be seen whether this will help to revive turnover," Schubert added.
He felt the changes would increase commercial bank's incentive to use ECB facilities instead of borrowing and lending between themselves.
"That said, the measures reduce the cost of getting liquidity, and it reduces the fear of a liquidity squeeze at least for solvent banks," Schubert noted.
Bank of America economist Gilles Moec said that "the ECB has just taken decisive steps to unclog the interbank market."
While less spectacular than Wednesday's rate cuts, they "could prove key to a gradual improvement in money market conditions," Moec added.
The reform in lending procedures meant that "the effective average main refinancing interest rate applied by the ECB on eurozone banks" actually fell by 1.24 percentage points, he said.
That was because banks that had bid for ECB funds recently had paid up to 4.99 per cent for the money but would now be charged 3.75 per cent.
"Turning around the interbank market and making banks lend again to each other will probably be a gradual process, given the current intensity of stress," Moec said.
"However, the ECB has now gone much beyond its 'liquidity injection only' approach to the crisis."
AFP