Australian bank shares up as global credit freeze averted

There have been solid gains in the share prices of Australia’s Big Four banks following co-ordinated action by the US Federal Reserve, European Central Bank, and the central banks of the UK, Canada, Japan and Switzerland to provide liquidity support to the global financial system and avert a potentially devastating credit freeze.

Among the top gainers this morning has been ANZ, with its share price trading more than 3% up from yesterday at $20.50.

At last check, Commonwealth Bank shares were up 1.4% to $48.84, Westpac shares had gained 0.6% to $21.18 and NAB shares are up 0.75% to $24.16.

Overall, shares have also rallied in Australia with the benchmark S&P 200 up 107 points to 4226.8 with the All Ordinaries index up 101 points to 4286 in morning trading.

A credit freeze would have substantially raised the cost of banks and other lenders raising wholesale funding offshore – a crucial part of the mix of money lent out to borrowers –and increased the likelihood that future interest rate cuts would not be passed on in full.

“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system,” said the US Federal Reserve in a statement overnight.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.”

From December 5, these central banks will lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points making it cheaper for indebted European banks to buy US dollars.

It is expected to take some pressure off the interbank lending market – where banks lend money to each other.

The reduced cost of borrowing will run until February 1 2013.

"This decreases the cost of funding in US dollars or other currencies so it's small, but it's a boost to banks' profitability and gives them a better chance to shore up their capital ratios,” Christian Schulz at Berenberg Bank told the BBC.

Schulz says the actions by the central banks won’t resolve the European sovereign debt crisis, it will “ease the panic around European banks significantly and help preventing a devastating credit crunch”.

Besides offering cheaper US dollars, as a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.

“At present, there is no need to offer liquidity in non-domestic currencies other than the US dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013,” the US Federal Reserve said.

This statement and similar ones from the other Central Banks had an immediate impact on investor sentiment with Wall Street's Dow Jones index rising 4.2%, its biggest gain since March 2009.

In Europe Germany's Dax index closed 5% higher, France's Cac 40 rose 4.2% and the UK's FTSE 100 rose 3%.

 

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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