CENTRAL BANKS

By John Authers 2008-10-08

At least one bank in the US is growing, and it is by leaps and bounds. It has added lots of clients in the last year, it has started offering interest on deposits, and yesterday, in a radical departure, it started offering short-term finance to companies other than banks.
The bank in question is the Federal Reserve. News that it will now launch its own special vehicle to buy commercial paper (very short-term bonds) directly from issuers means that it has in effect entered the business of lending to companies.
It had already taken over the provision of short-term finance to banks; banks are no longer willing to lend to each other but are still prepared to lend and borrow through the Fed.

The commercial paper move was necessary, as many large companies rely on it to fund day-to-day needs, like payroll. A failure in this area was unconscionable. And the constriction in commercial paper had become severe: the total volume on issue had fallen by 12 per cent, or about $200bn, in the past three weeks alone.
But the Fed's move merely underlined that vastly greater government involvement in the world's banking systems was in many ways already a fact. The only question – a critical one for investors in the institutions under pressure – is in the detail of how governments intervene.
Markets yesterday suggested they felt the sharp falls in materials and emerging market stocks over the past week had adequately discounted a global recession, at least for now.
But even if tension reduced, there was no joyous rebound. The drama in the stocks of banks at the centre of the rumours, with Royal Bank of Scotland the latest hapless victim, did not permit that. Stocks will find it hard to mark a definitive bottom and start to rise until they know many more details of how governments will insert themselves into the banking system.