The Fed announced $20 Billion for banks, which are facing sever credit crunch. The initiative is expected to bring increased liquidity in the financial market.
According to the news published by AssociatedPress, the Federal Reserve (Fed) is giving $20 Billion as loan to banks. This loan is part of a strange auction process that helps to ease a worldwide credit crunch and to ensure that financial institutions keep giving credits to their clients.
The Fed had announced 4.65% interest rate on short-term loan, which is lower than 4.75% charged by the Fed on banks on the emergency loans via its “discount” window.
To maintain the growth rate, smooth flow of credit is essential. It gives money to people to finance big-ticket purchases like personal cars and homes. It also helps companies and businesses in their expansion plans and hiring workers.
However, many big banks in the US and Europe were forced to write down assets worth billions because of poor bets on mortgage loans. Now the banks are thinking of making lending standards more stringent without access to capital. Moreover, the global credit crunch has a negative impact on lending among banks and this is impacting lending to businesses and individuals.
Credit crunch and fall in housing industry are making countries vulnerable to recession. Poor mortgage loans have hit financial companies with multibillion dollar worldwide. Furthermore, home foreclosures have touched a new mark.
If banks do not lend money to consumers and businesses at attractive interest rates, it will decelerate the economy of the US and the country will go into recession.
Therefore, the central bank had announced a new auction service for banks. This facility is created with a view to encourage banks to take cash directly from the Fed and use it to overcome their problems of credit. However, the banks are reluctant to utilize the concession Fed is giving because they are thinking that investors are not interested in it.
According to a Research Analyst at RNCOS, “The announcement of new funding by the Federal Reserve indicates high demand for credit in the country. With this new plan, banks can access funds at more reasonable interest rates than lesser interest rates from the market. This will increase the liquidity in the financial market which is facing the problem of subprime mortgage reduction.”
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