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Last Updated: Monday, 17 December 2007, 23:26 GMT
$20bn from Fed to ease credit woe
Dollar bills

The US Federal Reserve has made $20bn (9.9bn) available to major banks in an attempt to ease concerns about a global credit crunch.

Monday's auction is the first step in a plan agreed among five central banks, including the Bank of England and the European Central Bank.

The central banks hope that the auction will make retail banks and investment houses happier to lend to each other.

Such lending has become more expensive recently, adding to the credit squeeze.

The central banks plan to offer more than $100bn in loans to retail banks, after it became clear that cuts in interest rates were not having an effect on inter-bank lending.

US Treasury Secretary Henry Paulson said on Monday that there was no "silver bullet" to solve the credit market problems.

Risk control

The main reason banks and investment houses have been less willing to lend to each other is the downturn in the US property market.

The banks lent heavily to individuals taking out mortgages which they now may not be able to repay.

A subsequent surge in mortgage defaults and bad debts has forced many banks to cut the value of their investments, costing them billions of dollars.

As a result, the banks fear that they might need any spare cash they have to cover their losses.

The worry for the Fed and other central banks is that the higher costs would eventually be passed on to consumers, slowing economic growth.

As well as the Bank of England and Fed, the European Central Bank and the national banks of Canada and Switzerland are also involved in the plan, announced last week.

'Positive feeling'

Analysts said that the promise of extra cash was needed because the interbank lending rate had remained stubbornly high despite interest rate cuts in the UK and US.

On Monday, the Fed offered banks $20bn of 28-day loans, and analysts said they expected demand to be strong.

"There is a positive feeling in the marketplace about the auction," said Deborah Cunningham of Federated Investors.

The Bank of England is due to hold its first auction on Tuesday.

In London on Monday, the three-month interbank lending rate, also called the Libor, dropped for a third session.

It was down at 6.431%, compared with 6.627% on Wednesday when the central banks unveiled their rescue plan.

The lower the rate, the cheaper it is for banks to borrow money.

The central banks do not plan to disclose which retail banks have taken up the auction.

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